24/7 Wall St.

Chipotle Mexican Grill Inc. (NYSE: CMG) earnings knocked it out of the park this quarter, and investors are thrilled. In fact, most analysts seemed by thrilled as well. But after this report, two key analysts are still very bearish on the burrito chain.

Here, 24/7 Wall St. has included some brief highlights from the earnings report, as well as what analysts are saying about Chipotle after the fact.

Chipotle posted $1.72 in earnings per share (EPS) on $1.2 billion in revenue, which compares with consensus estimates of $1.34 in EPS and revenue of $1.19 billion, as well as earnings of $1.34 per share and $1.11 billion posted in the same period of last year.

During the most recent quarter, comparable restaurant sales increased 6.1%. At the same time, digital sales grew 65.6% in the quarter and accounted for 12.9% of sales.

Restaurant level operating margin was 17.0%, an increase from 14.9%. The improvement was driven primarily by leverage from the comparable restaurant sales increase. This was partially offset by increased marketing and promotional costs and wage inflation at the crew level.

Merrill Lynch’s Gregory Francfort maintained an Underperform rating for Chipotle but raised its price objective to $400 from $340, implying about a 33% downside from the current price level.

The brokerage firm noted comps of up 4% at the start of the quarter accelerated in December with CMG’s free delivery campaign. Strength continued into early January, but weather toward the end of the month has made it difficult for the company to pinpoint a specific current trend. As a result, Merrill Lynch models December and January up 10% and 12% and a slowdown to a more modest 5% to 6% rate as the benefits from the free delivery push is reduced. Chipotle pushed back on concerns around the margins on delivery sales, noting that those sales are accretive to margins even post-delivery fee, although it is not clear to us where costs are being allocated in that margin build.

Overall Merrill Lynch thinks Chipotle is a strong company executing on a solid sales growth plan, but the question is largely what investors are willing to pay for earnings, and are they comfortable with the assumptions that would be necessary to justify a more than 45-time multiple for the stock (at the current price).

Merrill Lynch gave its investment rationale as follows:

Chipotle is one of the few high-growth restaurant companies and has numerous appealing attributes that support continued unit growth. But while we believe the company has done a solid job of maintaining costs, particularly around labor, this likely limits further upside to margins. The company continues to trade at an expensive level on aggressive street earnings consensus and therefore we see risk to the stock going forward.

Wedbush maintained an Underperform rating but raised its price target to $500 from $440, implying a downside of roughly 17% from the current price level. Wedbush also increased its 2019 EPS estimate to $12.12 from $12.02 and its 2020 estimate to $15.78 from $15.08

The firm pointed out that price increases and the free delivery promotion led to about a 10% comp in December from 4% in the prior two months, according to management. Management stated that momentum from December’s and early January’s successful delivery drive (fourth-quarter delivery up 13 times year over year) continued, but recent poor weather has obfuscated the underlying trend. Wedbush interprets this as same-store sales growth, excluding weather, in the mid- to high-single-digit range quarter to date, versus 4.8% consensus for all of the first quarter.

A few other analysts were more positive on the burrito chain:

• BMO Capital Markets maintained a Market Perform rating and raised its target to $540 from $420.
• Stephens maintained an Equal Weight rating and raised its price target to $525 from $425.
• KeyBanc reiterated an Overweight rating and raised its price target from $525 to $625.
• CFRA reiterated a Buy rating and raised its price target from $500 to $650.

Shares of Chipotle were last seen up about 14% at $598.59, in a 52-week range of $247.52 to $606.00. The consensus analyst price target is $489.16.