In the midst of a global pandemic that shut down physical dining locations for several months, you’d expect restaurant stocks to plunge and stay low for a long time. Most have. Chipotle (NYSE:CMG) hasn’t. After a brief sell-off in March, shares of the fast-casual Mexican food chain have taken off like a rocket ship. Year-to-date, CMG stock is up 40% to all-time highs.
Why?
Because Chipotle has doubled down on delivery to both sustain operations today amid lower in-store traffic, and provide an entirely new growth vertical which will undoubtedly supercharge the company’s comparable sales trends for many years to come.
But this mega-delivery tailwind is already fully priced into shares.
That’s why, despite Chipotle reporting 216% growth in its delivery business in the second quarter, CMG stock dropped on the Q2 print.
The reality is that CMG stock is maxed out. The best of this rally has already happened.
So steer clear of Chipotle stock for now.
Here’s a deeper look.
Strong Growth Trends and CMG Stock
At present, CMG stock is supported by four strong growth trends which show that the Chipotle growth narrative is gaining momentum.
First, the U.S. economy is normalizing and consumer spending is rebounding. This is clearly evinced by Chipotle’s comparable sales progression over the past four months. Comps have gone from down 24% in April, to down 7% in May, to up 2% in June, to up 6% so far in July. This trend should continue for the foreseeable future as consumer activity continues to rebound.
Second, Chipotle’s digital business is on fire. Digital sales rose 216% year-over-year in Q2, mostly supported by Chipotle’s expanded presence across all third-party delivery platforms. Digital is the future of quick-service food ordering. The fact that Chipotle is gaining such robust early momentum in the digital space bodes well for the company’s future growth prospects as more and more order volume migrates into digital.
Third, Chipotle is still supported by a huge unit growth narrative. Even in the midst of a pandemic, the company still opened 37 locations in Q2; its total restaurant count sits at 2,669. That’s a far cry from the 5,000-plus stores many of the company’s larger QSR peers operate in the U.S. Over the next several years, then, Chipotle has a realistic opportunity to essentially double its store base.
Fourth, menu innovation continues to keep things “fresh” and drive strong traffic. For example, the company recently launched a pilot to test cilantro lime, cauliflower rice and began offering quesadillas as a digital-only entree. Management remains committed to launching one to two new menu items per day. Sustained menu innovation should help support favorable long-term comparable sales trends.
All in all, then, it is quite clear that Chipotle has robust long-term growth prospects.
Fully Priced Into Chipotle Stock
The only problem with CMG is that those robust growth prospects are fully priced into shares at the current moment.
Chipotle will probably open around 200 new stores per year over the next decade. That puts total restaurant count close to 5,000 by 2030. Comparable sales should remain largely positive throughout that stretch, boosted by menu innovation and digital business expansion. Average unit volumes will likely rise from ~$2 million today, to $3+ million by 2030. Total revenues will likely soar above $15 billion (versus less than $6 billion last year).
Restaurant level margins will improve with scale and higher unit volumes. But, they will be held back some by increased delivery revenue (which comes with increased fulfillment expenses). Still, I see RLMs pushing above 20% in the long run, and operating margins going north of 15%.
Those are aggressive assumptions. On those aggressive assumptions, my modeling suggests Chipotle will do about $90 in earnings per share in 2030.
High-quality restaurant stocks typically trade around 25-times forward earnings. A 25-times forward multiple on $90 in earnings per share in 2030 implies a 2029 price target for CMG stock of $2,250.
Discounted back by 8.5% per year, that implies a 2020 price target for Chipotle stock of less than $1,100.
Shares trade north of $1,100 today.
As such, valuation is a problem for Chipotle.
Bottom Line on CMG Stock
I love the Chipotle business. Huge unit growth. Consistently positive comps. Big digital growth. Exciting menu innovation. Strong unit volumes. And strong unit margins.
But the CMG stock price fully reflects those realities. Further upside in shares in 2020 is limited by this full valuation.
To that end, I don’t think CMG is a bad stock. I just think there are better opportunities elsewhere in the market at present.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not own a position in any of the aforementioned securities.
