Chipotle Mexican Grill Inc. (NYSE: CMG) is a highly valued stock relative to the broad market but it hasn't grown at the same pace as the average S&P 500 company. Trading at over 40x its earnings, it is nearly triple the value of the average S&P 500 company and nearly double that of fast food leader McDonald's Corporation (NYSE: MCD). It delivers results that back up the valuation. The outlook for 2023 earnings cuts the valuation by roughly 33%, according to analyst estimates, which speaks volumes in terms of the potential for returns. Add in the fact that institutions and analysts buy Chipotle stock and the valuation becomes even more attractive.
Slowing Growth No Deterrent for Sell-Side Investors
Chipotle Mexican Grill’s growth may be slowing on a year-over-year (YOY) basis but that's because of the law of large numbers. This year’s 13% growth is down from the prior year’s 22% growth but it is still worth $0.25 billion to shareholders. Additional Chipotle stock price growth is on the way.
Institutions own about 93% of the company and have increased their holdings over the past year. The last year’s activity netted an amount worth 6.2% of the market cap with the stock at $1,525 and top holders have been deeply committed to the name. T. Rowe Price is the top holder and owns about 10% of the company. Pershing Square Capital Management also controls about 27% of the company.
On the analyst end, the activity was mixed this year in the wake of the Q3 results but the community is firmly bullish. The consensus sentiment, a "moderate buy," has firmed a little over the last year and the price target assumes about 17% of upside movement. The consensus target is down from last year but steady over the last three- and one-month periods. The low price target of $1,510 assumes the stock is fairly valued so the downside should be limited unless analysts start souring.
Chipotle Impresses with Mixed Quarter
Chipotle Mexican Grill reported a mixed quarter for Q3 2022, with revenue that fell short of consensus and earnings that beat it. The real takeaway is that revenue of $2.2 billion is up 12.8% over last year and missed by a slim 140 basis points. The increase in revenue was driven by a 7.6% increase in comp store sales, compounded by the addition of new stores. In-store traffic surged by 22.1% as consumers return to normal while digital accounted for 37.2% of sales. The good news is that pricing actions have overcome inflation to some degree and resulted in a YOY improvement in restaurant level and operating margin. The operating margin improved by 280 basis points and led to earnings of $9.51, up 35.5% YOY and beat by 3,400 bps.
The Technical Outlook: Chipotle Bought on the Dip
The price action in CMG shares fell in the wake of the Q3 results but it appears to already have hit bottom. The candle forming at midday is a Doji showing support at the $1,500 level which could keep the stock from falling further. Assuming the market can hold the stock above $1,500, a sideways move should follow and as well as an eventual drift back up to all-time highs as the company executes its plans.