Is There More Upside to Chipotle’s Stock Price?

On Tuesday, Chipotle Mexican Grill (NYSE:CMG) hit a new 52-week high of $899 before closing the day at $890.95. The company’s stock price has increased by 106.3% since the beginning of 2019. The company’s stock price rose due to its strong performance in the last four quarters, management’s growth initiatives, and analysts’ positive commentary. So, is there more upside left in Chipotle’s stock price? Let’s look at analysts’ recommendations for 2020.

Analysts’ revenue expectations for Chipotle

For 2020, analysts expect Chipotle to report revenue of $6.32 billion—13.1% growth from $5.59 billion in 2018. Opening new restaurants and positive SSSG (same-store sales growth) could drive the company’s revenue. Chipotle’s management expects to open 150–165 restaurants in 2020. More than half of the stores will have Chipotlanes. The company’s management stated that it expects the SSSG for fiscal 2020 to be in the mid-single digits.

We expect the introduction of new menu items, increased digital sales, growth in loyalty program members, and marketing and promotional programs to drive the company’s SSSG. In September 2019, the company introduced carne asada. Chipotle is also testing new menu items like Queso Blanco, quesadillas, and various beverages. By the end of 2019, the company completed the installation of digital pickup shelves and second make lines for digital orders in all of the relevant restaurants. The company also expanded its delivery capabilities to 98% of the restaurants by the end of 2019. Now, Chipotle is focusing on Chipotlanes, which would improve the convenience for customers. By the end of 2019, Chipotle had 8.5 million members in its loyalty program. The company plans to enhance its CRM capabilities to improve personalization and engagement with its customers.

Chipotle’s EPS will likely rise

For 2020, analysts expect Chipotle to report an adjusted EPS of $18.44, which represents 31.2% growth YoY from $14.05 in 2019. Higher revenues, an improved EBIT margin, and share repurchases could drive the company’s EPS. However, a higher effective tax rate could offset some of the EPS gains. For 2020, analysts expect Chipotle’s EBITDA margin to improve from 8.9% in 2019 to 11.0%. We expect higher gross margins and lower operating expenses to improve the company’s EBIT in 2020. For the quarter, Chipotle’s management expects its effective tax rate to be 26%–29%. Meanwhile, analysts expect the company’s 2020 effective tax rate to be at 27.7% compared to 23.6% in 2019.

Analysts’ recommendations

Following Chipotle’s impressive fourth-quarter earnings, J.P. Morgan, Wells Fargo, Morgan Stanley, UBS, SunTrust Robinson, BMO, Credit Suisse, Jefferies, RBC, and Piper Sandler raised their target prices. Overall, analysts have given an average target price of $936.72, which implies a 12-month return potential of 5.2%. Among the 34 analysts that follow Chipotle, 44.1% recommend a “buy,” 52.9% recommend a “hold,” and 2.9% recommend a “sell.”

Valuation multiple

The sharp surge in Chipotle’s stock price since the beginning of 2019 increased its valuation multiple. As of Tuesday, Chipotle was trading at a PE ratio of 49.5x compared to 43.9x at the beginning of 2019. Also, the company was trading at a premium compared to its peers. McDonald’s (NYSE:MCD) and Starbucks (NASDAQ:SBUX) were trading at 25.4x and 27.6x, respectively. However, on the same day, Shake Shack (NYSE:SHAK) was trading at 121.9x.

Meanwhile, as of Tuesday, Chipotle was trading at 48.3x analysts’ 2020 EPS estimates of $18.44 and at 38.4x analysts’ 2021 EPS estimate of $23.21. They expect the company’s EPS to rise by 31.2% in 2020 and 25.9% in 2021.

Although Chipotle’s stock price has more than doubled since the beginning of 2019, we expect the stock to rise. Implementing Chipotlanes, expanding the delivery service, and new menu items could drive the company’s sales in the near term.