A Thriving Restaurant Company? In a Pandemic?
It is no secret that most restaurant stocks have been hard hit by the Covid-19 lockdowns. Most of the big chains went first to an absolute shut-down. As states began slowly to open up again, they transitioned to a modified-traffic model where drive-throughs were open – albeit with all the appropriate precautions taken to minimize infection risk – and curb-side pickup was offered, but restaurant lobbies remained closed. Today, with most states in some stage of being opened, we’re seeing people returning to their dining out routines, even if only in outside seating or at socially distanced table arrangements.
One national chain that found a profitable compromise to these trends was Chipotle Mexican Grill (CMG). The former 90% McDonald’s-owned chain initiated a Covid response that not only took “contactless” to a new level, it also enabled most of its restaurants to stay open to diners. This enabled the company to surge ahead of competition, and to win back the market share it lost during the national lockdowns in March.
I know this first-hand. Back in June during the pandemic peak that hit southern states with a bloom of new cases, I took my family on a road trip from Northern Virginia to Southern Florida and back. Since this five-state odyssey entailed frequent stops for food to feed the kids, we found at most stops that the only fast-food joint that allowed us inside to use the restrooms, create our own burritos, and fill up on bottomless drinks was Chipotle.
This strategy was noticed by Greg Francfort, equity analyst for Bank of America. On September 28, the 4-star analyst added $125 to his price target for the stock, citing “minimal drive-through exposure” to the pandemic lockdowns and “better-than-expected comps” in the most recent quarter.
Investors also took notice of Chipotle’s strategy. After the March swoon that crushed the stock down to a low of $415 per share, CMG soared nearly 1,000 points to peak near $1,384 before pulling back, a gain of 233% in less than six months!
Is there still upside left in this play? Yes, and quite a lot. Here is why. From a valuation perspective alone, CMG currently trades in the top 10% of peers per its Price-to-earnings (P/E) ratio, in the top 5% per its price/earnings-to-growth (PEG) ratio, and in a year when most chain restaurants are showing deep red numbers for earnings, CMG ratcheted up its rate into the green by triple digits (+103% year over year) — a pace unmatched by any peer.
Most important, the company is the ONLY enterprise in the restaurant space that has raised earnings-per-share (EPS) estimates for both this year and next. This is key because the strongest correlation between forward price movement and any fundamental metric is the rising EPS estimate. Chipotle, in fact, is not only raising its estimates for this year, it is predicting a huge 95% jump in income for 2021 which is, again, the best in class.
This is why the stock this year has received no less than 20 upgrades and “buy” reiterations with — in every case — raised price targets. When a company raises its earnings estimates, everyone’s valuation models also change and that brings higher price estimates into play. Jim Cramer of CNBC’s “Mad Money” is also keen on the stock. He lists Chipotle as one of his four food chains that would remain standing by end of the year, financially speaking. He also recently noted that the stock “has much more room to run.”
Here’s something else to consider: according to current estimates, up to 80,000 fast food restaurants will have closed permanently by the end of the year due to the lockdowns. Many of these are in prime locations, and Chipotle is eyeing some of them, especially in markets where it lacks penetration. Currently, the chain operates in 2,580 sites in the United States, plus a handful of overseas locations. But with these cheap boxes on sale, the company is now stating it wants to grow that number to 5,000. Chipotle is also on track to hit its $2.5 million average unit volume by the end of 2022. But its plan for this expansion phase is to raise that to $3.5 million.
So, with all that projected growth, with a decrease by attrition in the competition, and with strong analyst support, I am suggesting adding shares of CMG to your long-term portfolio.
Action to Take: Consider buying CMG under $1,350 and selling at $2,500 or the end of 2022, whichever comes first.
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