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Chipotle is ‘poised to show major earnings power”, says analyst

On Tuesday, Baird analysts led by David Tarantino raised their price target on shares of Chipotle to $1,600, noting that “the company appears well positioned to show meaningful increases in average unit volumes and margins as in-restaurant traffic patterns rebound.” The Final Round panel discusses the bullish call.

Video Transcript

MYLES UDLAND: All right, welcome back to "The Final Round" here on Yahoo Finance. Time now for our call of the day. And today we are talking about Barron's latest note on shares of Chipotle. The firm is reiterating its outperform rating, raising its price target on the stock to $1,600 a share for Chipotle shares today. They're up about 9/10 of 1%. Bit better than the market, but not a whole lot going on with that stock sitting just below $1,300 a share.

But this note from Barron basically outlining everything that Chipotle management is excited about with the company and sees, essentially I guess-- and it's a phrase I've come back to a lot, perhaps too much, over the last couple of months-- but the pandemic serving as a kind of step change in where Chipotle can realistically benchmark gross revenues per store, how their engagement on the digital side-- you know, they're pretty much second right now to Starbucks in that category-- how that really changes the trajectory for the business. But I do think that this note, in many ways, gets us back to a conversation we have on this show quite often, which is are the analysts feeling compelled to sort of chase the stock higher?

Chipotle has been one of the best performers during the pandemic period. The stock is at, basically, a record high. And now we have an analysts putting a price target about 20% above the current level of the stock, essentially because the company seems to be doing very well. And I do wonder, you know, Dan Roberts, when we look at the other side of the pandemic, is Chipotle maybe more at risk than it currently seems of seeing a normalization in trends, where Chipotles are open, Chipotle has a great ordering experience digitally, but maybe in 12 months we don't have to feel like all those COVID kind of precautions are a reason to be so excited about a restaurant we maybe ate too much during this period.

DAN ROBERTS: Well, actually, my take is that there's no reason this momentum, especially on the digital side, should slow after the pandemic. And in fact, there are now Chipotle locations where they've opened the area, I guess-- the dining room area-- and you can walk in, but you're only walking in to order in person and go. Two locations near me in Connecticut, that's the case. So you can do curbside pickup, which is so popular and it's all on the app and the digital. It's working so well-- and by the way, that's the thrust of this note to me-- digital, digital, digital, which we know.

We've talked about that before the pandemic, and they're killing it on the digital side amid the pandemic. But at these locations, and here's some of our favorite anecdata-- sorry-- near me, you can order on mobile and stand outside in a line for the curbside-- that's fine-- if you don't want to go inside. But I also see a lot of people coming and entering inside, and they haven't ordered yet. And they wait in line with the masks on inside to order. But then it's still to go, because the in-house dining room is closed. So you're comfortable going inside, but just to order and leave.

And what it makes me feel like is that could be the future for a lot of Chipotle locations. I mean, why have the dining room at all? And now you'd answer, well, what about people who want to eat there? Fine, you know, not everyone wants to sit in their car and eat. Fine, maybe there'll be people comfortable, and they do that, and slowly that emerges.

But I just feel like we have talked to death, and with good reason, the success of drive-ins for Starbucks, you know, the-- McDonald's, the usual fast food places, but also Dunkin' Donuts, places that we didn't always think of as drive-through places-- not drive-ins. I should say drive-through, not drive-in. Well, we've talked about the success of the drive-throughs, and then the touchscreens at many of these drive-throughs, and then the success of digital and mobile ordering. That was already on the rise before the pandemic. It's going to continue even after the pandemic.

And just like, I think, Amazon, soon enough, if not already, is going to start having locations that literally act as Amazon distribution centers-- I mean, it's kind of like the curbside, the rise of curbside with Dick's Sporting Goods, where a lot of people are doing BOPUS, which is either you pick up or you have it shipped from your local store, so it's even faster.

I think we're going to see Chipotle move to have areas that really the store only exists to have a drive-through and to have mobile pickup, and there's really not much of a reason to have much space inside for people to sit and eat inside. So I think the momentum-- I see good reason to be bullish even past the pandemic. I don't know why it would slow.

MELODY HAHM: I don't think it's a zero-sum game, though. I mean, Chipotle has been very bullish on the Chipotlanes. As you point out, Dan, they do have a hundred of the drive-through locations.

But in this note, the specific point that is a differentiator among its competitors is a compelling concept, not only the gourmet premium ingredients, but the layout of the store, the unique decor with the steel tables, the plank wood floors, open-view kitchen where it feels like it's not really in the same category as a McDonald's, as a Wendy's, as a Dunkin' Donuts, as any of those brands.

So I do feel like that sort of investment and that infusion of capital into the store experience perhaps will be the main sort of-- hey, what-- let's feel a little bit healthier, let's feel a little bit bougier, for the same amount of money we can spend and go to Chipotle. And one point I want to bring out-- you know, we spoke to a vegan restaurateur and chef last week. And he said, you should never go out to a meal and feel crappy-- like, you should never have "itis" or a level of heaviness the next day, where you don't want to move.

I do feel like Chipotle, through the turnaround strategy under Brian Niccol, has been able to achieve that, right, whether it's their marketing scheme of trying to show all these fresh ingredients, but also the actual product itself, there is a way that you can indulge without feeling so heavy and bloated. And I do feel as though, during this pandemic, starting with sourdough bread and then sort of going 180 to being super healthy and trying to be fit during this time, Chipotle kind of captures a lot of categories here, if you think about it, for the average customer who wants to be able to eat well, but not be gluttonous.

MYLES UDLAND: As long as you don't get the sour cream, that's fine. Right?

MELODY HAHM: Yeah, exactly, you get the guac. Good fat. [LAUGHS]

MYLES UDLAND: Guac's als-- their guac's a little flat, I will say. It's not really worth the $2.75 or whatever. I think the salsas are fine.

DAN ROBERTS: They have fixed the queso, which I have to shout out and give them credit for. Remember when they rolled out queso? It wasn't good. They knew it, they said we're fixing it, and I think they have fixed it, though my one Chipotle complaint-- the burritos aren't well constructed. They collapse too quickly, I have to say.

MYLES UDLAND: All right. You heard it there. Let's get on the burritos.

The folks over at Chipotle-- I think, Dan, the issue is that they put too much stuff in it. Like, I don't think it's a training issue. It's that there-- if there's too much stuff in it, then you can't get around all the stuff.

DAN ROBERTS: So would you rather get more ingredients but it falls apart in your hands and doesn't have a nice, tight wrap to it until the very end, or have less? I think I'd go less with the tighter wrapper.

MYLES UDLAND: Yes. Yes, definitely. less.