Fast casual Mexican eatery Chipotle (NYSE:CMG) is set to report fourth-quarter numbers after the bell on Tuesday. My research indicates that those numbers should be pretty good — good enough to spark a nice post-earnings rally in Chipotle stock. And, perhaps good enough to lift shares above $900 for the first time ever.
The logic here is simple. The U.S. consumer remains in a great position, and U.S. spending on food services accelerated in the fourth quarter. Against that favorable spending backdrop, Chipotle continued to do what it has done all year long to drive huge traffic growth and market share expansion.
That is, they added exciting new menu options and continued to expand the digital business. They also ran relevant promotions, employed unique marketing and integrated more technology into the customer-ordering process.
All year long, those initiatives have driven double-digit comparable sales growth, with 5%-plus traffic growth, 13%-plus revenue growth and 100 basis points or more of restaurant level margin (RLM) expansion. This big growth has propelled Chipotle stock from $500 a year ago, to nearly $900 today.
This dynamic likely persisted in the fourth quarter. As such, Chipotle appears positioned to report blockbuster numbers on Tuesday — the likes of which have the potential to push shares to new highs.
Fourth-Quarter Numbers Should Be Good
Overall, Chipotle’s fourth-quarter numbers should be pretty good for two major reasons.
First, the consumer spending backdrop improved in the fourth quarter. That is, consumer spending on food services in the U.S. rose a 2019-high 4.8% year-over-year in the fourth quarter. That’s versus 3.7% growth in Q3, 4.6% growth in Q2 and 4.4% growth in Q1. Consequently, the macro backdrop for Chipotle in the fourth quarter was better than it’s been all year long.
Second, against that 2019-best consumer spending backdrop, Chipotle continued to do what they’ve done all year long to drive huge growth. This includes menu innovations, as Chipotle launched Carne Asada nationwide at the end of the Q3. The company proceeded to extend that menu innovation in November.
Furthermore, the huge growth also includes relevant promotions, as Chipotle’s “Meatless Mondays” promotion started in early Q4. The company also held a “Buy-One, Get-One Free” promotion on Veteran’s Day.
Chipotle concurrently pushed forward with unique marketing campaigns. Of note, Chipotle upped its marketing in the ultra-popular Tik Tok app, through the Boorito Deal campaign in October and a collaborative ad campaign with Tik Tok’s biggest stars during the Super Bowl. Even further, in late November, Chipotle announced that customers can use Alexa to reorder their favorite Chipotle meals for delivery or pickup.
Chipotle has been making moves like this all year long, and they’ve been the right moves to make. Collectively, through the first three quarters of 2019, they have driven huge traffic growth, huge comparable sales growth, huge margin expansion and huge share price gains.
This trend didn’t break in the fourth quarter. Instead, it may have actually accelerated. As such, Chipotle’s fourth-quarter numbers should be pretty good.
Chipotle Stock May Run Above $900
The one knock against Chipotle stock heading into the fourth quarter print is valuation. That is, bears will argue that at 50-times forward earnings, the stock is already fully priced for blockbuster fourth-quarter numbers.
There’s some truth to that. A 50-times forward earnings multiple is rich for a restaurant stock. Across this category, the average forward earnings multiple is about 27, according to Yardeni Research. Chipotle stock is trading at nearly twice that.
However, Chipotle is also growing about twice as fast because of its huge unit growth potential and rapidly rebounding profit margin profile. The average projected long-term earnings growth rate for the restaurant industry is about 10%. According to YCharts, consensus Wall Street estimates have Chipotle growing earnings by 30% next year, 25% the year after that and 20% in the long run.
Thus, given its bigger long-term growth potential, Chipotle stock isn’t fully valued here. Instead, it’s reasonably expensive.
Reasonably expensive stocks tend to keep going higher so long as strong operational momentum persists and supports the valuation. That’s exactly what will happen with Chipotle, as strong Q4 numbers will provide additional support for the valuation and the stock will go higher.
Bottom Line on CMG Stock
Chipotle is set to report fourth-quarter numbers after the bell on Tuesday, and those figures should be pretty good.
If they are, then Chipotle stock has a realistic opportunity to shoot above $900 over the next week.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.