The macro slowdown and its impact on future consumer spending add uncertainty over the prospects of restaurant operators, including Chipotle Mexican Grill (NYSE:CMG). The effect of it is already reflected in the moderation of Chipotle’s comparable sales growth in Q3. Nevertheless, the minimal resistance to its price increases and high-income customer base positions it well to navigate the macro challenges well and deliver solid margins, which will likely support its stock.
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Here’s Why CMG Stock Looks Attractive
Chipotle recently announced its Q3 financials, wherein its comparable sales (comps) increased by 7.6%, which came slightly higher than analysts’ estimate of 7.3%. Further, the company managed to expand its margins and delivered better-than-expected Q3 earnings of $9.51 a share.
However, its comps growth rate slowed sequentially (it delivered a comps growth rate of 10.1% in Q2).
Lower-income consumers’ reducing frequency and macro headwinds are to blame for this slowdown. Further, cost headwinds and higher wages pressure its margins.
Chipotle announced menu price increases to counter cost inflation, which will support margins. Meanwhile, most of its customers are from higher-income households, implying that they would continue to increase their purchase frequency, supporting CMG’s sales.
In response to its Q3 performance, Stifel Nicolaus analyst Chris O`Cull stated, “With consumer spending softening, we would like to see comp estimates come down modestly for 2023 (Street 5.7%, Stifel 4.0%). However, we believe offsetting a softer sales outlook is a more favorable margin outlook as commodity and labor inflation appear to be moderating and recent pricing action continues to provide a benefit.”
On the valuation front, the analyst added that his price target of $1,750 “is based on a DCF [discounted cash flow – a valuation technique].” The analyst added that his price target implies that CMG shares trade at 23 times the next 12-month Enterprise Value/EBITDA multiple one year from now, which is lower than the current multiple of 25, making it attractive.
Notably, CMG stock is down over 9% this year. However, it fared better than the S&P 500 Index (SPX), which is down about 20% year-to-date.
Bottom Line: Is CMG Stock a Buy?
Chipotle’s growing comps, solid margins, and robust balance sheet with $1.2 billion in cash and zero debt position it well to open new units and easily navigate the economic slowdown.
CMG stock sports a Strong Buy consensus rating on TipRanks based on 17 Buy and three Hold recommendations. Further, analysts’ average price target of $1,832.20 implies 15.7% upside potential.
CMG stock has an Outperform Smart Score of “Perfect 10.”
