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Chipotle Gains on Strong Earnings Results; Will it Continue?

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Shares of Chipotle Mexican Grill, Inc. (CMG) have seen a surge of almost 16% since the company reported solid second-quarter financial results on July 20.

Furthermore, the Mexican food restaurant chain operator gained around 60% in the past year and 19% over the past five days.

Chipotle’s menu mainly offers salads, tacos, and burritos. Apart from the U.S., the California-based company operates restaurants in France, Germany, Canada, and the U.K. (See Chipotle stock charts on TipRanks)

Chipotle Impressive Q2 Results

Chipotle reported adjusted diluted earnings per share that stood at $7.46, beating the Street’s estimates of $6.49. The earnings were up 1,765% year-over-year, which remained impressive.

Quarterly revenues came in at $1.9 billion, up 38.7% year-over-year and marginally surpassing analysts’ expectations of $1.88 billion.

Comparable restaurant sales grew 31.2%, while digital sales continued to be a strength for Chipotle, increasing 10.5% year-over-year to $916.5 million.

The restaurant chain's operating margins increased by 24.5%, a significant increase in light of salary increases for workers in a highly competitive labor market.

The earnings results show that consumers have returned to the dining scene, and it appears that the company should continue to perform well.

Will the Surge at Chipotle Continue?

Chipotle seems positive about the future endeavors of the company.

For Q3, the company provided impressive guidance, which sparked enthusiasm among the investors. It expects comparable restaurant sales to grow in the low to the mid-double-digits range.

Chipotle also plans to open another 200 new restaurants or more during the calendar year. In addition, the company has added some menu items and raised prices to help offset increasing costs.

Chipotle is making the most of the limelight. On July 21, the company announced that it will offer “gold foil wrapped burritos” to honor American athletes competing in Tokyo Olympics and encourage fans to root for first-place performances in the coming weeks.

This new initiative could further expand the sales for the restaurant chain’s digital segment going forward.

During the Q2 earnings conference call, the CEO of Chipotle, Brian Niccol, said, “We remain confident in our key growth strategies and believe they will help us achieve our next goal of $3 million average unit volumes with industry-leading returns on invested capital that improve as we continue to add Chipotlanes. Strong restaurant-level economics combined with significant restaurant growth should allow us to optimize earnings power for many years to come.”

Based on the above factors, Chipotle prospects look strong and could become a favorite pick for investors.

Analysts’ Views Following Earnings Announcement

The Wall Street community is cautiously optimistic about the stock, with a Moderate Buy consensus rating based on 17 Buys and 7 Holds. The average CMG price target of $1,757.09 implies 4% downside potential from the current levels.

Following the Q2 earnings release, Raymond James analyst Brian Vaccaro reiterated a Buy rating on the stock with a price target of $1,800 (1.7% downside potential).

Vaccaro raised his 2021 and 2022 earnings estimates to $25.32 and $36.62 per share, respectively.

Another analyst, Stifel Nicolaus analyst Christopher O`Cull, reiterated a Buy rating but increased the price target to $1,850.00 from $1,750.00. This implies 1% upside potential to current levels.

Though O`Cull remains concerned about inflation, the five-star analyst expects Chipotle's restaurant margins to improve over time as sales volumes continue to rise.

Chipotle’s Risk Factors

According to the new Tipranks Risk Factors tool, Chipotle’s main risk category is Production, which accounts for 28% of the total 25 risks identified. The next two major risk factor contributors are Finance & Corporate and Legal & Regulatory, which stand at 20% each.

Since June, Chipotle has added one new risk factor, under the Finance & Corporate category.

Under the above-mentioned category, Chipotle highlights that the exclusive forum provisions in the company’s amended bylaws might raise the expenses of filing certain types of legal dispute. In turn, that could deter shareholders from filing such disputes or limit shareholders' ability to seek a favorable court venue for such issues.

Chipotle stock risk
Chipotle stock risk

Bottom Line

The risk factors show the challenges a company faces, so that investors can consider the worst-case scenarios before making an investment in this company.

Overall, the Finance & Corporate risk factor’s sector average is 34.9%, compared to Chipotle’s 20%.

Disclosure: Shalu Saraf held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.