No Spice In Chipotle Results, Is Now The Time To Buy?

Key Points

• Chipotle Mexican issued weak results, but mitigating factors offset the news. 
• Strong growth in rewards membership was a headwind but a sign of core strength. 
• Growth is on the table in 2023, just slower than in years past. 

Chipotle Mexican Grill’s NYSE: CMG Q4 results were without spice and have left the market moving lower but this is no time to be selling this stock. While results were tepid in relation to the analysts' expectations there are mitigating factors that reveal the company’s true strength. One of those factors is the test run of garlic guajillo steak which did not perform as well as the test run in December 2022.

Another is the impact of rewards membership. The company’s rewards membership not only grew 20% YOY but a higher level of engagement resulted in more free stuff. While a headwind, this shows the company’s brand and pricing power remain strong and have it set up for solid performance in 2023. 

Chipotle Has Strong Quarter, Just Not Strong Enough 

Chipotle had a strong quarter in every way measurable but not strong enough to outperform the analyst estimates. For example, the $2.2 billion in revenue is up 11.2% versus last year but missed the consensus by 130 basis points. In this light, 11.2% growth is far more important than 130 basis points, but those basis points could keep the stock price under pressure in the near term.

The gains were driven by a 5.6% comp store increase coupled with store growth. In-store sales grew by 17.5%, while digital accounted for 37.4% of the mix. The loyalty-rewards program cost the company about 80 basis points of revenue which is almost enough to offset the slim miss by itself.

Moving down to the income portion of the report, margins expanded at all levels. The company reported a 380 basis point improvement in restaurant-level margin and a 540 basis point improvement in the operating margin, driving a nearly 50% increase in earnings. The adjusted earnings of $8.29 are $0.60 short of the consensus thought and another factor that may weigh on share prices in the near term. 

Looking forward, the guidance is favorable, but the law of large numbers may be another factor in capping prices. The company is forecasting low-single-digit comp-store growth for 2023 and the addition of at least 8% more stores. This will drive earnings growth, but growth is slowing, and the valuation is still quite high.

The stock is trading at roughly 50X its earnings with earrings growth slowing, which means it is highly valued. While it is worth the value, the market may be in for a “wait and see” period until the earnings catch up with the value. 

The Analysts Like The Flavor Of Chipotle Results 

The analysts have the stock pegged at a Moderate Buy and have the price target moving higher in the wake of the Q4 results. Marketbeat.com analyst tracking tools have picked up 13 new commentaries so far, including a price target change. Three of those changes are downward, the other 10 upward, and have the consensus target at $1871 or about 13% above the current price action.

If this trend continues, the analysts could get the stock back to all-time highs, but it may take another catalyst to get this market to break out to new highs. 

Turning to the chart, the analysts’ $1871 target is just shy of the all-time high and consistent with the idea this stock is range bound. In this light, investors may want to wait for pullbacks in price action before loading up. The next major catalyst for this stock won’t come until the next earnings report, but the signs are already there that results could be better than expected. The latest restaurant survey data shows sales in February are up VS January and last year.