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Summary

  • Chipotle’s stock price performance has remained solid and has returned around 66.31% in the last year.
  • Recently, a positive note issued by Cleveland Research Co. grabbed the investors’ attention and as a result Chipotle approached a $700 stock price for the first time.
  • In the third quarter, Chipotle is expected to show strong same store sales growth.

Chipotle Mexican Grill's (NYSE:CMG) stock is trading at new highs and this stock has greatly outperformed its competitors and the S&P 500 index. At this point in time, the stock is trading at $676.95 which is roughly 3% lower than its 52-week high of $697.93. This stock's 52-week low price is $398 and it has showed some volatile movements during the year. Despite the volatility, Chipotle's stock price performance has remained solid and it has returned around 66.31% in the last year. On the other hand the S&P 500 has returned 22.53%, Starbucks (NASDAQ:SBUX) returned around 9% and Yum! Brands (NYSE:YUM) returned just 0.99% over the same time frame.

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Source: Ycharts

Recently, a positive note issued by Cleveland Research Co. grabbed the investors' attention and as a result Chipotle approached a $700 stock price for the first time. According to Bloomberg statistics, this year Chipotle has gained around 29.3% and the S&P 500 restaurant index fell 0.4% over the same period.

Chipotle's Outlook Is Still Strong

Chipotle has many bright spots that are delivering good growth numbers in each quarter. The robust revenue growth, compelling net income and per share earnings growth, and improving cash flows from operations are the reasons why this stock possesses more upside potential going forward. Chipotle's revenues growth is much higher than the industry average and this growth pace is expected to continue in the next several years. Chipotle is consistently increasing its store count and offering new products across its menu. Also, Chipotle has become a strong name in the food industry and its customer base is consistently growing. These factors will maintain its fast growth pace over the next several years. In the third quarter, Chipotle is expected to show strong same store sales growth, increased guest count, and successful realization of price increase for the first time in a few years.

Chipotle increased the prices of its menu items due to rising commodity prices. The company's menu prices increased by 2.5% in the quarter which started in April; however, this increase was only a partial impact. The actual average menu prices increased by 6.25% to 6.5% and this figure varied by menu item and by market. The market was expecting a negative impact and hoped that the company would experience fall in its customer traffic. However, this price increase was welcomed by Chipotle's customers. Instead, Chipotle experienced a 2.5 percent point impact of higher prices on its 17.3% increase in same store sales in the second quarter and also reported an increase of 5% in average check size.

The pricing impact is also likely to be reflected in the third quarter of this year. It is expected that Chipotle will report third quarter per share earnings of $3.81 reflecting an increase of around 43% from the third quarter of the previous year. Also for the third quarter, it is estimated that the company would generate $1.06 billion in revenues and $4.07 billion for full year 2014. These estimates reflect increases of 28% and 26% respectively.

Chipotle to Keep Increasing Restaurant Count

As of June 30th 2014, Chipotle operated a total of 1681 restaurants and is still aggressively increasing its store count. For the first six months of 2014, Chipotle opened 89 new stores out of which 45 were opened in the second quarter of this year. For full year 2014, Chipotle plans to open 180 to 195 new restaurants which means the company will open around 100 new restaurants in the second half of this year. This increased number of restaurants justifies the fact that Chipotle is keen to continue its expansion. The new restaurants will play an important role in maintaining double-digit growth because more restaurants means more customers.

Apart from keep increasing restaurants, it is most important for Chipotle to maintain same store sales growth in the long term. For this year, Chipotle expects an increase in comparable restaurants in the mid-teens and this is a decent target when considering the soft outlook of the restaurant industry. Chipotle's comparable store sales target is pretty achievable in the long-run when one considers its current growth rate. In the first half of 2014, Chipotle experienced a 15% increase in comparable store sales which was primarily due to increased traffic and to a lesser extent from an increase in its average check.

Conclusion

The profits and the cash flows are growing and this is another bright spot for Chipotle. For the first half of 2014, net cash flows generated from operations were $360.4 million reflecting a healthy boost of around 34.6% compared to last year's figures. Along with the double-digit revenues and earnings growth it is also necessary for Chipotle to maintain its cash flows growth to finance its future expansion.

Chipotle is spreading its operations into different directions and launched its catering services with the aim to increase its overall sales and earnings stream. Its catering business has been doing well and catering sales increased 0.3% in the second quarter to around 1.6% of total sales. These numbers are not very significant but going forward with the improvements and expansion in operations this business can deliver decent growth in the long term.

Chipotle is trading at a forward price to earnings multiple of 39.2 times and it looks expensive. However, Chipotle is a growth stock and it has re-tuned profits to its investors. For the next five years, it is estimated that Chipotle may show average growth of 23.60% in its EPS and this significant growth is the reason for stock's higher valuation multiple. Considering these factors, it is the most likely scenario that this stock is capable of providing more impressive returns in the future.

Source: Chipotle Is Flying High