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Time to Buy Chipotle (CMG) At New High After Morgan Stanley Upgrade?

Benjamin Rains
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Time to Buy Chipotle (CMG) At New High After Morgan Stanley Upgrade?

Chipotle (CMG) saw its stock price surge over 6.6% Wednesday to hit a new 52-week high after Morgan Stanley (MS) analysts upgraded the embattled fast casual powerhouse. The question is should investors buy Chipotle stock now?

Chipotle CMG saw its stock price surge over 6.6% Wednesday to hit a new 52-week high after Morgan Stanley MS analysts upgraded the embattled fast casual powerhouse. The question is should investors buy Chipotle stock now?

Upgrade

Morgan Stanley upgraded Chipotle from “in line” to “overweight” Wednesday noting that the burrito chain’s turnaround plans seem to be working. The firm also raised its 12-month price target to $600 per share, which represented a roughly 21% upside from Tuesday’s closing price of $493.32 per share. “CMG is still early into a sales turnaround and has an attractive management change narrative and earnings recovery story," MS analyst John Glass wrote in a note to clients.

“While still early days in the brand's long-awaited recovery, there is increasing evidence that makes our bull case scenario more believable, including (1) a change in management, with an incentive plan designed to deliver the bull case in earnings (+$20 in EPS), (2) plenty of low hanging opportunities in marketing, product development and operational initiatives to drive sales, and (3) a more benign competitive environment," Glass continued.

Shares of CMG climbed over 6.6% to hit a brand new 52-week high of $526.39 per share.

Business Overview

Some of Morgan Stanley’s upgrade pointed directly to the company’s new CEO Brian Niccol, who was hired earlier this year after heading up Yum Brands’ YUM Taco Bell. The move came after the company had suffered nearly two years of weak sales on the back of multiple food-safety concerns and customer service problems.

Since officially taking over as chief executive in early March, after founder Steve Ells stepped away from the role, Niccol saw Chipotle post solid second-quarter financial results.The company saw its Q2 revenues climb over 8% to reach $1.3 billion. The restaurant company’s comparable store sales also popped 3.3%, while its restaurant-level operating margin jumped from 18.8% to 19.7%.

Chipotle’s turnaround did not come on the back of major discounts or Taco Bell-style food mashups, although the company has rolled out some new offerings and is currently testing more menu items. “I’m not planning on playing that game,” Niccol told the Wall Street Journal in April. “I’m planning on playing a different value game: offering great food with great ingredients that you don’t get anywhere else.”

Activist investor Bill Ackman, of Pershing Square, holds a large chunk of Chipotle stock and has notably pushed the fast-casual chain to add drive-thrus and serve breakfast. “I’ve been very clear with him: Not now,” Chipotle’s CEO continued. “Bill and I have had a couple of really good conversations. He may have some ideas that I don’t think are the right ones now.”

One change that many investors and consumers will welcome is the possibility of longer hours. Niccol is reportedly in favor of opening earlier and closing later. Plus, the company is currently testing bacon and announced just last week that it will start to test “build your own nachos” and late-night deals throughout Denver and Minneapolis-St. Paul in October after seeing strong results during a smaller trial run.

Stock Price Movement

Shares of Chipotle have plummeted over 30% during the last three years. Yet, CMG stock has performed far better as we narrow the focus, with shares up over 30% in the last 24 months. Furthermore, CMG stock has skyrocketed over 81% since the start of the year, even before Wednesday’s huge climb, which crushes its industry’s slight decline and even tops Amazon’s AMZN 61% growth.

 

Outlook

Chipotle is projected to see its quarterly revenues pop by nearly 10% to reach $1.24 billion, based on our current Zacks Consensus Estimate. Looking just a bit further ahead, the company is expected to post full-year revenues of $4.85 billion, which would represent a roughly 8.3% surge.

CMG’s adjusted quarterly earnings are projected to skyrocket by nearly 55% to $2.06 per share, while its fiscal year earnings are expected to soar 30%. Plus, Chipotle’s Q3 EPS projection has climbed by $0.10 over the duration of the current quarter, while its full-year figure has jumped $0.18. This means that analysts’ earnings sentiment has climbed recently.

Chipotle is currently a Zacks Rank #3 (Hold) and sports an “A” grade for Growth and a “B” for Momentum in our Style Scores system.

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