Chipotle Shares Holding Near All-Time High, But May Be Extended

Chipotle Mexican Grill NYSE: CMG is trading in a potentially bullish tight formation after zipping 11.54% following the company’s strong second-quarter earnings report last month. 

Earnings increased to $7.46 per share, up from $0.40 per share a year ago, during the Covid-battered second quarter. Revenue was $1.89 billion, up 39%. 

Earnings and revenue growth both accelerated in the past two quarters.

The stock cleared a cup-shaped base on July 7 in below-average volume. The stock then moved into a fairly tight sideways pattern for the next three weeks before the earnings report. 

Although a low volume breakout is not ideal, as it can signal tepid enthusiasm, the tight sideways trade can be a precursor of more gains to come.

That’s what happened in this case, although an earnings report always has the potential to send a stock sharply in either direction. Often, a company can top views but there’s something in the guidance, or even a seemingly insignificant comment buried deep in the earnings release that scares Wall Street. 

As it happened, Chipotle topped analysts’ views by $0.94. Revenue also beat expectations. 

In the quarter, comparable-store sales, new store openings and restaurant-level margins were all strong, giving institutional investors a dollop of confidence.  

While in-store dining business has increased, the resurgence of Covid cases may put a dent in the restaurant rebound. 

Within the restaurant sub-industry, Chipotle is among the strongest performers, when you take fundamental and technical performance both into account. 

Following the earnings report, the stock advanced more than 17% for the week in double the average weekly volume. It rallied to a high of $1912.75 on August 5, although volume was 31% below normal. 

So far this week, shares are down 1.07%, closing Tuesday at $1867.62. While the pullback has been mild, and in tandem with Tuesday’s broad market decline, it’s certainly possible that renewed fears over Covid may derail some of the enthusiasm about the stock. Part of the company’s growth case was a bounceback in lunch business from returning office workers, but it appears that may be pushed back, perhaps by several months. 

However, the company has said that measures such as loyalty programs, easier digital ordering and installing second make lines, or Digital Kitchens, have helped ramp up sales. 

Most Chipotle locations now have these second lines, designed especially for takeout and delivery orders. It’s also allowed the company to tinker with menu items and develop new concepts. 

For example, earlier this year, Chipotle launched Lifestyle Bowls, available for online ordering. It’s also been testing other items, such as quesadillas, which are also now widely available. 

Of course, shortages of various types, and higher commodity prices are affecting many businesses these days, and food service is right up there with exposure to these headwinds. Restaurants are grappling not only with higher food costs but also higher wages, freight costs, and bottlenecks in the supply chain. In its second-quarter report, Chipotle managers noted the possibility of margins being squeezed on a full-year basis for those reasons. 

Chipotle has a market capitalization of $52.57 billion. As a large company, it’s likely well-positioned to weather the storm of a worsening Covid wave in the coming months. To that end, even the stock’s detractors remain at least somewhat optimistic. 

For example, Raymond James analyst Brian Vaccaro slashed his rating on the stock to outperform from strong buy, but also raised his price target to $2025 from $1800!

In his note, Vaccaro explained that his concern was about the current valuation following the recent price rise. 

The consensus estimate on Chipotle is a “buy,” with a price target of $1754.13, representing a 6.18% downside. 

Strictly speaking, the stock is in the buy range, as it’s finding support just above its 10-day average. However, it’s also showing some signs of being extended, so caution is in order if you’re making a buy. The tight trade appears bullish, but be aware if investors decide it's time to take some profits.