CMG Stock Forecast: Chipotle Mexican Grill (NYSE:CMG) is often overlooked by investors in favor of legacy fast-food stocks like McDonald’s. Chipotle has, however, turned in some of the best performance of any restaurant chain in 2022.
With the company poised to grow and the stock sold off by over 20 percent this year, Chipotle could be a solid buy in the fast-food industry.
In Q3, Chipotle’s revenues rose to $2.2 billion, 13.7 percent higher than in 2021. Comparable restaurant sales were up 7.6 percent, indicating strong ongoing performance from Chipotle’s existing locations. Total in-restaurant sales, meanwhile, increased by 22.1 percent.
Earnings rose sharply from Q3 2021. Chipotle reported $9.20 per diluted share, 28.1 percent higher than in 2021. This was a modest beat compared to the average analyst estimate of $9.15, but it represents an impressive year-over-year growth trend.
Chipotle also performed quite well in terms of margin. The Q3 earnings report detailed an increase of operating margin to 15.1 percent from 12.3 percent the previous year.
Restaurant-level operating margin also rose to 25.3 percent. These rising margins indicate that Chipotle is weathering inflationary pressures better than many of its competitors.
Chipotle could be primed for a long-term growth streak. Management eventually expects to grow the chain to 7,000 stores, compared with just 3,000 currently. In 2023 alone, management plans to open 255-285 new stores. Thanks in large part to this expansion plan, Chipotle is expected to grow at a compounded annual rate of 27.4 percent over the next five years.
What Do Analysts Forecast for Chipotle?
Analysts are very bullish on Chipotle’s prospects in the coming year. The median CMG stock forecast is $1,800, a gain of 30.8 percent from the most recent price of $1,376.30.
The lowest target price is $1,510, suggesting that even the most bearish outcome would result in a return of nearly 10 percent. Rounding out this impressive coverage is the fact that 23 out of 36 analysts rate the stock as a buy, while none have offered a rating lower than hold.
Despite its many strengths, Chipotle may not be the best fit for value investors. The stock currently trades at a forward P/E ratio of 41.78 and a price-to-book of 16.55 Both of these metrics strongly suggest that Chipotle is overvalued. While it does produce $34.81 in cash flow per share, this is fairly modest in comparison to Chipotle’s share price.
One factor that does somewhat offset Chipotle’s high valuation is its effective lack of debt. Without debts to service, the company is in a far better position to re-invest in growth while avoiding rising interest rates. Although this doesn’t fully justify Chipotle’s high pricing multiples, it is a positive factor in the company’s favor.
Will Recession Take a Bite Out Of Chipotle?
The most pressing concern investors should consider before buying Chipotle stock is the possible effect of a recession on the company’s growth plans.
With such a high valuation relative to earnings, Chipotle stock already has high growth priced in. If an economic downturn or other factors delay the company’s expansion, the stock could see a price decline to reflect slower growth.
Labor has also emerged as a potential challenge for Chipotle. Between rising minimum wages and an extremely tight labor market, Chipotle is being forced to pay more for its workers.
In its reporting for Q3, the company detailed total labor expenses of $557 million. This was up from $503 million a year earlier. Continued increases in labor costs could force Chipotle to raise its prices, potentially weakening consumer demand.
Chipotle is also subject to competitive forces from other restaurants. Chains such as Qdoba and Taco Bell also offer fast, casual Mexican menus.
While Chipotle is performing very well, these chains could draw business away from it in the future. Taco Bell, in particular, could benefit from an increase in Chipotle’s pricing that drove consumers toward cheaper alternatives.
CMG Stock Forecast: Is Chipotle a Buy?
Chipotle clearly has many positives working in its favor. The company’s ability to raise margins despite inflation, for example, is an impressive feat that few of its competitors have been able to replicate. Rising earnings during times of high inflation are also extremely positive
Given Chipotle’s rising comparable store sales and its plans to more than double its store count, investors will likely see earnings continue to grow for several years.
As such, steady growth in share prices for a long period of time is relatively likely. The expansion management envisions will likely take many years, but investors will probably see fairly steady returns along the way.
A final point in Chipotle’s favor is its strong appeal to Millennials. Chipotle enjoys some of the highest market penetration among this age group. The company’s focus on fresh ingredients and generally healthy menu make it a natural fit for Millennials, who are beginning to enter their prime earning years.
On the downside, Chipotle must grow at a relatively fast pace to justify its price. If management fails to expand the restaurant count as anticipated, it’s difficult to imagine that the stock will perform well.
So far, however, the company’s execution under its current leadership has been quite good. Barring unforeseen obstacles to growth, there’s little reason to believe Chipotle will abandon or reduce its expansion plans.
Chipotle has strong potential to produce outsized returns in the coming years. Given this opportunity for growth and its relatively acceptable risks, the stock appears to be a solid buy for a wide variety of investors.
Growth investors seeking rapid gains could see excellent returns on a relatively short timeline, while conservative investors will likely appreciate the company’s lack of debt, rising margins and solid execution.
While value investors may shy away from it due to its high price, Chipotle stands out as a good stock to consider buying in today’s market and holding for the long haul.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.