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After A Strong Year, Chipotle May Take A Breather
Stock Analysis & Ideas

After A Strong Year, Chipotle May Take A Breather

Chain restaurant stocks have been resilient throughout the COVID-19 pandemic, however, referring to Chipotle Mexican Grill (CMG) as resilient would be an understatement.

CMG recovered from the initial pandemic-led sell-off within a couple of weeks, and despite reporting relatively flat earnings for the year, the fast casual restaurant chain’s stock is trading nearly 70% higher than its pre-pandemic levels.

Shares received an additional recovery-trade-related boost following positive vaccine news last November, but the upward momentum has since cooled, and the stock has been trading sideways in recent weeks.

Earnings projections for 2021 and 2022 are strong and the chain, which has shifted to a more delivery-focused model, is set to turn its unexpected tailwinds into massive growth over the next few years.

However, following its impressive run over the past year, CMG’s stretched valuation may limit how much more it can gain in the near-term and further sideways momentum might be expected.

What Caused Investors To Bid Up CMG In 2020?

With 2020 earnings ($12.52 per share) just a few cents higher than 2019 earnings ($12.38), why did investors assign so much value to Chipotle stock?

It may have been due to the company’s ability to quickly adapt its business model to the “new normal.” As a result, its operating results held up relatively well, even during the height of lockdowns.

The anticipation of materially higher earnings in 2021 and 2022 are keeping investors excited with consensus estimates of $22.98 per share for this year, and $30.45 per share in 2022.

Growth at such high levels may warrant a high valuation, but after factoring that in, CMG’s valuation may have over-shot its own growth which could result in more muted returns going forward.

Why Valuation Looks Stretched

Based on 2021 earnings estimates, CMG currently sports a forward price-to-earnings (P/E) ratio of 64.7x, which is leaps and bounds ahead of its peers.

While comparing it to the valuations of similar names isn’t exactly a fair comparison, its higher-than-average projected growth may warrant a higher-than-average valuation. Chipotle’s impressive growth prospects may keep the stock from falling back to triple digit prices, but the fact that this growth has already been priced into the share price may limit how much more CMG stock can continue to climb.

In other words, it’s your classic “grow into its valuation” situation. Shares could continue to trade sideways while other restaurant stocks climb on the “recovery trade” narrative.

Chipotle’s earnings are expected to get a boost from the anticipated global recovery but given the choice between investing in a stock that might be overvalued at current levels versus a stock that has not yet fully recovered, investors might be more inclined to choose the latter.

What Analysts are Saying About CMG Stock

According to TipRanks, CMG receives a Moderate Buy consensus rating based on 15 Buy and 9 Hold recommendations. The average analyst price target of $1,647.57 implies around 16% upside potential from current levels over the next 12 months. Price targets range from a high of $2,000 per share to a low of $1,165 per share. (See Chipotle stock analysis on TipRanks)

Bottom Line: Chipotle Stock May Hold Steady From Here

After adapting its business model to a post-pandemic reality, Chipotle was able to remain resilient while similar chains saw a much larger drop-off in sales due to lockdowns.

Investors have rewarded CMG stock for the company’s resilience and post-recovery growth with a high valuation, but this top-performing restaurant stock of 2020 might have reached its limits.

As a result, shares have little reason to head lower as the company’s prospects remain bright. However, with all of these positives already factored into the share price, CMG stock could continue to trade sideways in the near-term.

Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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