Why Chipotle Mexican Grill’s Stock Is Worth $465

Chipotle Mexican Grill‘s (NYSE: CMG) new CEO, Brian Niccol, has had an upbeat start to his tenure as the company has posted strong revenue and earnings growth in his first two quarters, largely beating consensus expectations on both metrics. Sales improved by 7.9% in the first six months of FY 2018, driven by comparable sales growth of 2.8%, due to price increases, and new restaurant openings. This positive performance aided in the restaurant level margin expansion of 130 basis points. Based on the performance of the company in the first half and the expected showing in the remainder of the year, CMG raised its full-year comp sales guidance from low single-digits to a low-mid-single-digit comp range. We expect the strong showing to continue in FY 2019 also. As a result of the upbeat results posted by the company, its stock has increased a massive 68% year-to-date. We have estimated CMG’s price to be $465 which is 5% lower than the current market price. The charts have been made using our new, interactive platform. The various driver assumptions can be modified by clicking here for our interactive dashboard on Our Outlook For Chipotle Mexican Grill In FY 2019, to gauge their impact on the earnings and price per share metric.

We have based our price estimate on expected revenues of $5.25 billion in FY 2019, net income margin of 6.2%, and a P/E multiple of 38.6. The high multiple is solely based on the expected performance of the company in the future. As per our estimates, there is a high possibility of CMG’s earnings crossing $20 per share post-2021, based on the aggressive expansion plans and increasing comps. Despite a challenging environment, the company has also been able to reign in its food and labor costs, resulting in a higher net income margin. These factors should bode well for the company in the future. Our revenue growth forecast is based on the following factors:

1. CEO Change: Brian Niccol joined CMG as its new Chief Executive Officer (CEO), effective from March 5, 2018. Niccol comes from Yum! Brands where he was the CEO of Taco Bell. He was instrumental in implementing a successful turnaround of that business. Niccol comes with strong expertise in digital technologies, restaurant operations, and brand building, and these skills are crucial for Chipotle’s turnaround. During the first quarter earnings call, Niccol mentioned the possibility of expanding to breakfast items, and incorporating drive-thrus, besides increasing the focus on the digital platform.

2. Accelerating Digital Sales: This is the fastest growing part of CMG’s business, with annualized digital sales totaling $0.5 billion, reporting a growth of 33% in the second quarter, and which now represents 10.3% of the total sales of the company. In 2018, CMG intends to accelerate the rollout of its digitally-enabled second make-lines to 1,000 restaurants, from 500 currently. These new lines enable a faster, and a more accurate experience for the digital customers, and allows CMG’s staff to more easily support the higher sales volumes. The company’s ‘Digital Pick Up Shelf’ initiative, which it is testing in 5 stores, not only provides a faster and a more convenient experience for mobile pick up orders, it also serves as an in-store marketing gimmick to raise awareness among its customers that they don’t have to go through the line to pick up their orders.

3. Adding Catering and Delivery: Catering forms roughly 1% of the total sales, and is a largely untapped opportunity for the company. CMG has expanded its delivery availability to 1,800 restaurants, and expects to reach 2,000 by the end of the year. The company has noted that mobile and delivery orders are in that $16 to $17 range, while the traditional check is roughly $12. Since the company’s delivery sales continue to grow at a fast pace, CMG intends to expand the number of delivery partners it works with. The company earlier shared details of its successful partnership with DoorDash, its largest delivery partner, and stated that Chipotle has seen a 667% increase in weekly delivery orders since initiating the partnership.

4. New Restaurant Openings: CMG opened 34 new restaurants in Q2 and expects to be at the lower end of its 130 to 150 new openings guidance for the full year. Moreover, the company has plans for a similar number of openings for 2019 as well. New restaurant openings can have a significant positive impact on the company’s revenues. Meanwhile, the company is also in the process of closing 55 to 65 underperforming restaurants.

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