Price on date of analysis: $890.51
Market cap: $24.52B
Overall assessment: HOLD
Why did CMG pique my interest?
We all saw the brand and company almost die. It is interesting to see how it is recovering.
Since recovery sales and profit were growing fast.
Stock price appreciated from the bottom $300 to $864 in the past year.
CMG Overview: company, category description
A Delaware corporation, Chipotle Mexican Grill Inc. (CMG), together with its subsidiaries operates quick-casual and fresh Mexican food restaurant chains. The company was founded in 1993 by Steve Ells who started with a single restaurant in Denver, CO. The company offers a focused menu of burritos, tacos, burrito bowls (a burrito without the tortilla) and salads. Chipotle restaurants feature free-range, hormone-free pork, natural chicken and other meat products cooked through traditional methods and served in a unique atmosphere. Chipotle classifies its restaurants as end-caps (at the end of a line of retail chains), in-lines (in a line of retail chains), free-standing units and others.
Chipotle, being one of the most recognized fast-casual Mexican restaurant chains in the United States, had a good share of negative publicity throughout 2016 due to an issue of food-borne illnesses that surfaced toward 2015-end. As a safety measure, the company was forced to close several outlets. In order to chalk out a viable business strategy, Chipotle discarded its former co-CEO model and appointed former Yum! Brands' executive Brian Niccol as the CEO.
Following the crisis with food-borne illness a few years back, sales for the company were quickly declining, causing the stock price to drop from the high of $750 to $300. Since then, as consumer fears faded and the company trust recovered, sales started to increase. With that the company was showing strong profit/EPS growth and stock price rebounded.
CMG Financial overview
Since 2015 crisis, the company sales rebounded quite nicely and in 2019 sales increased to level above 2015 level (+$1B). However, its Gross Income is still behind 2015 levels. Gross Margin was 23% in 2015. In 2016, it fell to 9%. Since then, it slowly increased to 17% in 2019. The key for CMG is to restore Gross Margin to the level it was in 2015.
Looking at the trend for CMG we see there is a bit of a seasonality in company’s performance. Sales and profit usually jump in the first 2 quarters of the year, then they stay flat or slightly decline in the last 2 quarters of the year. In Q4 EPS usually declines. Levels of Q4 sales are clearly showing YOY growth. A recent decline in EPS is a seasonal effect. EPS is still above Q4 2018 levels.
The chart below shows adjusted EPS.
Latest quarter was a very positive one for CMG. Revenue reached $1.44 billion from $1.23 billion. Comparable restaurant sales advanced 13.4%, reflecting Chipotle's eighth straight quarter of higher comparable sales. Revenue rose 17.5% to $1.44 billion, slightly higher than the estimate of $1.40 billion. The analysts were looking for a rise of 9.8% in comparable sales. The average check at restaurants rose 5.4%.
Excluding one-time items, the company earned $2.86 per share, compared with estimates of $2.75. Net income rose to $72.4 million, or $2.55 per share, from $32.02 million, or $1.15 per share, a year earlier.
CMG also increased SG&A expenses over the past 3 years. The net result of lower Gross Margin and higher expenses is overall lower profit vs. 2015 despite revenue is up. The key for the company is to continue lowering its expenses and increasing Gross Profit to see stronger profits.
The tables below show unadjusted diluted earnings per share.
Looking at the past few quarters it is unfortunate to see that sales were sluggish in the past 2 quarters with no growth. However, as we saw above this is a normal thing for CMG with seasonality in its Gross Profit and Net Profit.
The tables below show unadjusted diluted earnings per share.
CMG Key financial ratings/Stock Value
The outlook for EPS growth for CMG is quite positive. This year the company made $12.38 in EPS.
The estimates are the following:
2020: $18.6 (+50%)
2021: $23.41 (+26%)
2022: $28.04 (+19.8%)
2023: $36.5 (+30%)
CMG is currently priced at PE Ratio of 68.5 compared to the Hospitality industry average (25.2x).
If we look at the PEG ratio (Price-to-Earnings-to-Growth) is 68.5/31.5% expected annual growth this gives a PEG ratio of 2.17 which is also a bit high (usually a ratio of 1 considered to be good).
However, next year if the company makes $18.6 in EPS, its PE will be 46 at current price and PEG will be 1.44.
CMG Ratings by analysts
Zack’s giving CMG a ‘BUY’ rating with strong Growth and Momentum. Value is low.
There are 34 analysts covering CMG. The average rating is ‘Overweight’.
Target price for CMG is $899 which is 4% above current price.
The ‘snowflake’ analysis by SimplyWall is saying CMG is high growth potential. Similar to Zack’s it thinks the company stock value is low.
Who owns CMG? Changes in ownership
Institutional ownership of CMG outstanding shares is high (95.71%). Institutions are trading CMG among themselves quite heavily with almost the same number of shares sold and acquired by institutions.
CMG Buzz (StockTwits)
There has been recently an increased interest in CMG with number of conversations almost triple. However, sentiment is quite negative with only 57% bullish comments.
Unless there are any sudden problems like salmonella virus in their food there are few risks for CMG. It is taking a unique niche of fast-food Mexican food. It is likely to continue a path to growth as predicted by analysts.
CMG Overall assessment and summary
I am undecided about this stock, stuck between HOLD and BUY. The recent strong quarter with CMG beating estimates and strong outlook by analysts is causing quite a lot of positivity for the stock. The recent price movement is quite interesting with stock price going down, but quickly rebounding with a strong daily candle from the previously formed resistance level.
The EPS is expected to grow at a healthy average rate of 31%-32% in the next few years.
However, stock PE and PEG are slightly high for the current price. It seems that the earnings growth expectations are already accounted for in the current stock price. The optimism behind the stock may result in further growth in stock price. However, there is a chance it will take a bit of a break and move side-wise for a bit before growing again. Also, analysts currently have the target price for CMG that is close to current price.
When analyzing the stocks I always think whether I would actually buy this stock for my portfolio. I look for the upside potential vs. risks. In this case I am undecided between Hold and Buy, and when I am undecided this means 'Hold' for me as I would not actually buy this stock at this price.
My rating: HOLD
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