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Chipotle Is a Great Company, but the Stock Looks Pricey

Restaurant crisis, you say? Not if you’re an investor of fast casual chain Chipotle Mexican Grill (CMG). The restaurant industry’s struggles during the pandemic have been well documented, as enforced closures have decimated the sector. But CMG shares recently notched an all-time high, blasting through the $1000 mark.

So what is driving the forward momentum?

Several reasons. Firstly, Chipotle has done an excellent job boosting its digital presence by increasing the focus on the takeaway and delivery segment. The move has paid off handsomely during the pandemic.

While Chipotle’s excellent Q1 earnings results saw revenue increase by 7.8% to $1.4 billion, digital sales really shone – increasing by 80% to a record $371.8 million and amounting to 26.3% of overall sales.

Marketing efforts have paid off too, with a massive increase in loyalty program members. Daily sign-ups almost quadrupled in the month leading up to the earnings release.

Another element working in Chipotle’s favor is its position within the wider spectrum of eating out habits. Chipotle is part of the limited service category, which has been taking an increasingly large chunk out of total restaurant share. Within that segment, the fast-casual category in which Chipotle belongs, is growing faster than other segments. Add the increasing popularity of Mexican food into the mix and you have a recipe for success.

Deutsche Bank analyst Brian Mullan agrees. The analyst believes “Chipotle's first-mover and growing competitive advantages in the digital and loyalty arenas leave it poised to take outsized category share over at least the next several year period.”

However, Mullan’s positive assessment is tempered by the stock’s recent mercurial gains.

“While all-time highs make sense to us, the risk-reward has of course changed by nature of the recent rally… As a result, we will try to exercise some patience / discipline and not push our long-term assumptions too hard in order to support a Buy rating in the here and now. We would look to get more positive on any pullbacks, should the opportunity present itself,” Mullan concluded. Accordingly, Mullan rates Chipotle shares a Hold. (To watch Mullan's track record, click here)

The analyst fraternity’s views on Chipotle is currently split down the middle. A Moderate Buy consensus rating is based on an even 13 Buys and Holds, each. The recent gains mean the average price target of $901 represents downside of 9% and a change. (See Chipotle stock analysis on TipRanks)

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