Is Chipotle Starting To Look Cheap Here?

For a stock that has dropped 25% since the middle of September, Chipotle Mexican Grill (NYSE: CMG) is sure attracting a lot of favorable attention. You’d typically expect that kind of multi-month sell-off to be justified, and perhaps backed by several analyst downgrades, but not so with the king of main street burritos. And even as shares dipped towards their recent lows yesterday, there’s a growing feeling on Wall Street that now could be the time to start backing up the truck. Let’s take a look at some of the positive things Chipotle has going for it. 

For starters, their Q3 earnings from last October comfortably beat analyst expectations on both topline revenue and bottom-line EPS. The former was up 22% year on year, helped along by a solid rise in comparable restaurant sales as well as digital sales, which accounted for close to half of all sales. Brian Niccol, Chairman and CEO of Chipotle, said at the time that these results “demonstrate strong momentum in our business fueled by a multi-pronged strategy and a passionate team that's delighted to welcome more guests back into our restaurants”. But even though the stock’s performance suggests that investors aren’t quite buying the optimism, and are perhaps spooked by the Omicron variant, more and more sell-side heavyweights are starting to join the bull camp. 

Chorus of Upgrades

Just last week, the team over at Morgan Stanley upped their rating on the stock to Overweight from Neutral, on the basis that “the business has been fundamentally transformed for the better by the pandemic and points to best-in-class pricing power.” Analyst John Glass and his team are viewing the current bout of selling as an ideal buying opportunity and entry point for investors, and had this to say; "while our call here doesn't break new ground with an out of consensus view on the fundamentals, we find the upside offered by CMG as attractive relative to the rest of our coverage universe, and we believe CMG has a unique combination of attributes that make it the best large-cap growth story in restaurants (unit growth, rising new store productivity, digital advantages, pricing power among them), providing the fastest EPS growth over the next three years vs. larger-cap peers."

Their $1,920 price target suggests there’s upside of about 30% to be had from Wednesday’s closing price, a return not to be sniffed at as the major indices find themselves under pressure already this year. Morgan Stanley’s comments echoed that of Oppenheimer, who also upgraded Chipotle to an Outperform rating this month, and added them to the firm’s Top Pick list for 2022. Oppenheimer analyst Brian Bittner says Chipotle management's smart use of pricing provides the margin visibility required to buy into the model's earnings power transformation.

Large Bull Camp

But that’s not all. UBS, Cowen Evercore ISI, and Argus have all also come out with either upgrades or price target increases to their Chipotle stock coverage in the past three months which begs the question, just how cheap is Chipotle at these current levels? Some of these firms have price targets on the stock well over the $2,000 mark, which would put shares at fresh all-time highs. Analysts seem to be just loving the company’s expansion of its digital channel, and believe it to be in a better position to capitalize on this consumer trend than any other fast food restaurant out there. 

For those of us thinking about heeding the advice and getting involved, it’s worth pointing out that the stock is starting to enter a support channel, where the bears ran out of steam last year, and where you might expect a bid to return this time. The stock’s RSI is also below 30, indicating extremely oversold conditions, so unless you think the smartest guys in the room are missing something, you couldn’t really be asking for a whole lot more of a discount. Unless there’s something going on underneath the hood that has yet to be made public, it looks for all the world that Chipotle is trading at a massive discount relative to its potential, and the advice being given is to buy, buy, buy.