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Chipotle can grow earnings 40% this quarter and still lose

A Chipotle Restaurant sign is shown outside a Chipotle Restaurant in San Diego, California in this file photo taken September 24, 2013. Chipotle Mexican Grill Inc on Thursday reported a bigger-than-expected increase in sales at established restaurants and a nearly 30 percent rise in earnings, sending shares up more than 10 percent in extended trading. REUTERS/Mike Blake/Files (UNITED STATES - Tags: BUSINESS)

When Chipotle (CMG) reports earnings Oct. 20, it will do so amid a level of optimism unlike any seen in at least the past four years -- and if it doesn't deliver, shares may be in for a very long day.

Third-quarter earnings per share at the Denver-based burrito seller are estimated to soar more than 40% from last year, while sales for the more than 1,600-store restaurant operator should climb almost 30%, Wall Street is forecasting. One might imagine this wouldn't be out of the ordinary for a fast-growing company with a winning stock and food-selling formula that keeps drawing adherents, but, in fact, it isn't ordinary at all. Over the last five years, analysts have never called for the amount of year-over-year growth from the chain that they are this time, according to FactSet.

Chipotle will detail its numbers after the close of trading Monday. It should earn $3.84 a share, a gain of 44.4% from last year's $2.66, on a 28.2% advance in revenue, to $1.06 billion from $826.9 million. How different are these from the usual pre-earnings views? In the previous 16 quarters, the average forecast was that EPS would climb 20.8% from the comparable quarter. The previous high pre-report number was a 40.2% rise that was seen for the second quarter of 2012. With revenue, a line not affected by share counts and far less subject to interpretation or one-time items, the situation's the same. This quarter's outlook easily surpasses the previous high estimate of 23.9% for the first quarter of 2012, as well as the average estimated quarterly growth for the last few years of 19.6%.

[Related: Restaurant earnings: The pressure's on Chipotle]

Additionally, only days ago the same-store sales consensus estimate was 16.6%. It's now 17.1% -- 660 basis points above the prior best, which was a 10.5% estimate before the second quarter of this year. Chipotle reported 17.3%.

The good news for the stock's believers is that, on the whole, Chipotle has been better than projected, turning in a 25.2% EPS increase and revenue that's been up 21.7% over the years surveyed. It certainly might meet, or top, the forecast numbers again, though it also wouldn't be entirely surprising if it didn't. Because even as, on average, it's been strong, it's been far from perfect. In the last 20 quarters, back to the third quarter of 2009, profits have disappointed investors a half-dozen times, most recently in the first quarter of this year. Revenue has fallen below the outlook three times, though none since the third quarter of 2012. Same-store sales have also missed estimates three times.

Market winner

What's notable now is the degree to which Chipotle will have to expand in order to impress -- it could grow its EPS 40% and its sales 25%, both remarkable numbers, and traders may decide that deserves a major drop. This stock does tend to have considerable moves after earnings, with an average increase of 10% for the 12 times it has risen in the last five years of earnings quarters and an average 7.5% decline for the eight losses.

[Related: Chipotle's wrong -- fast food isn't going away (not yet, at least)]

Should its results not be up to par, the justification for selling would have ample backing. Eight standard valuation measures provided by FactSet are all above their five-year averages, including the forward price-to-earnings ratio, currently at 38.9 vs. the 34.3 that's standard. That pointed out, it's also true that the high was a 47.3 multiple and that the all-time peak share price of $697.93, set on Aug. 21, has given way to a 7.4% drop and a $647 price at present. So clearly Chipotle has lost some ground, and some of the richness of its P/E, though it remains up 22% year to date. Conceivably, that could limit the downside from any miss.

That's assuming a miss even happens. And even if it did, the fallout may be only for the short term. Chipotle's been through challenging quarters before, yet it's been brilliant overall, and there's little reason to believe its ascent is in any real jeopardy. Though it's had two down years since its 2006 IPO, the stock has climbed nearly 1,400%, with a compound annual growth rate of about 36%. Among publicly traded restaurants, it's now the fourth-largest measured by market cap, at $20 billion.

Chipotle's gotten here because its model has worked. It's unusual in that it owns all its namesake stores. While it takes on all the operating costs, it also has complete control. It has a social agenda, committing itself to the environment and ingredient transparency. Employees make the food right in front of customers, supporting perceived freshness and healthfulness -- even if it isn't at all a low-calorie meal. Although the company raised prices on some items, traffic remains terrific. More broadly, it's benefited from the proliferation of Tex-Mex-style restaurants and from the surge in the fast-casual industry, which has been gaining consumers from McDonald's (MCD) and other fast-food operators. And it's involved in other food types, namely ShopHouse Southeast Asian Kitchen and pizza maker Pizzeria Locale.

What Chipotle has in its favor makes for a lengthy list. Betting against it to keep the momentum going would require bravery -- or foolishness. Relatively few do, and they're in decline, as short interest in the stock is about 3.8% of the float, half of what it was a year ago.

But for now, it needs to demonstrate more mind-boggling growth. That, or face a none-too-happy crowd Tuesday morning.