Is Chipotle Mexican Grill A Buy Before Earnings?

Is This Another Vee-Bottom I See?

With earnings season ramping up activity in the analyst’s community is heating up. Over the past few days, a number of sell-side analysts made comments on Chipotle Mexican Grill (CMG) that raised the question, is this stock a buy before it reports earnings? The company is slated to report Q1 figures on Tuesday after the close of trading and from what I can see the market is expecting good things.

Before I move on I want to touch base with the chart. The chart of daily candlesticks looks pretty bullish and could easily fall into the category of Vee-Bottom if the rally continues. After making a deep dip to the $450 level, shaving 50% off its pre-virus price, the stock made a bounce that reclaimed more than 75% of the lost value. Now, with both MACD and stochastic strongly bullish, a move up to reclaim the all-time high is very likely.

The Analysts Are Getting Bullish Again

According to Piper Sandle analysts Craig Johnson there are powerful forces driving price action in Chipotle Mexican Grill. According to him, the company’s strong loyalty base and expected shift toward take-out and drive-through options set it up fro strong performance in the post-viral world. As of last November Chipotle was planning on putting drive-through lanes in as many as half of its new stores. According to CEO Brian Nicol, the whole process will take customers 12 seconds because they can order and pay online before ever showing up at the store.

“The technicals and the fundamentals, stars and moons are aligned on that one, and we would definitely be a buyer of that heading into the print, too,”

Analysts Nancy Tengler, CIO of Laffer Tengler Investments, shares the sentiment. In their view, Chipotle’s free-cash-flow growth is another positive that will help support prices over the long-term.

“We love the story. We love the stock. It’s a loyal, loyal customer base, with free cash flow that’s up over 60% year over year. So, if we get a little pullback, we’ll continue to add to our holdings in here.”

The average analyst’s rating for Chipotle Mexican Grill is neutral but there are signs of bullishness in the data. Over the last 90 days, the average rating has been edging higher as sell and neutral ratings are reevaluated. As it stands now, there are now bearish sell-side analysts rating the stock leaving the field evenly split between neutral and moderately bullish. Assuming the company is able to weather the storm and emerge stronger as expected, these ratings should begin to rise soon. When it comes to growth stories like this a wave of bullish upgrades can be enough to spark a long-term rally in share prices.

Headwinds Abate, Tailwinds Begin To Blow

Evercore ISI issued a note this morning that adds strength to the bullish picture emerging around Chipotle Mexican Grill. They note that headwinds experienced in the pre-viral world are dissipating and, better yet, may turn into tailwinds as soon as the current quarter. Before the pandemic began Chipotle was plagued by tight labor markets, difficulty finding employees, and finding high-quality sites for new restaurants. Now, in the post-viral world, finding high-quality employees will not be as hard and there will be much less competition for real estate. 

“We believe these two headwinds could become tailwinds with the opportunity for accelerated share gains, lower labor costs, and improved site selection / lower real estate cost."

The analysts are expecting Chipotle to report EPS in the range of $2.66 for Q1, this is down -21% from the previous year and reflects the impact of virus-related store closures. What the market will be looking for, more than anything else will be the guidance for the rest of the year. The analysts see revenue falling by about 3% with EPS down 32% in 2020 and then both rebounding strongly next year. If the company is able to satisfy expectation we could see share prices pop.

How To Trade This Stock

Chipotle may not be a buy going into earnings but it certainly isn’t a sell. The technicals are bullish and reflect a similarly bullish fundamental story so there is a bullish case to be made. Cautious investors may want to wait until after the report is released, just to be sure, but by then it may be too late. Those with more appetite for risk may choose to enter a small position now, before the news hits the market, with the idea of buying more at the next opportunity post-earnings release.