Every year, InvestorPlace asks ten people who work in and around the investment industry, to pick a stock they think will outperform the indexes. Not one of our experts chose Chipotle Mexican Grill (NYSE:CMG) in 2019. That’s too bad because Chipotle stock is up 42% year to date through March 1.
If Chipotle were in the group of ten stocks, it would be leading the pack. It’s a wonder, Kyle Woodley, InvestorPlace’s former managing editor didn’t run with Chipotle stock for a second consecutive year. In 2018, CMG stock delivered a 49% return, good enough for second place.
The Chipotle turnaround is real. The question investors are asking themselves at this point is whether the stock can keep moving higher. Despite all of its health & safety woes in recent years, CMG is trading within 19% of its all-time high of $758.61, reached in July 2015.
I see Chipotle stock retesting its all-time high within the next 12 months. Here’s why.
The Taco Bell Guy
When Chipotle hired Brian Niccol to run the company, there was a lot of skepticism from investors. Some analysts questioned whether bringing in the former Taco Bell CEO in February 2018 would move the needle enough to rescue CMG stock — it was trading around $300 at the time.
“It looks like to me that this is really just a relief rally that’s starting to form,” said Piper Jaffray analyst Craig Johnson at the time of Niccol’s announcement. “You can go up another 7% just to get back to the 50-day [moving average] on this stock, and if you were to really reverse a long-term trend, you’d have to get above $400.”
It did and then some.
Brian Niccol’s history of turning around companies and rebuilding brands made him the right person at the right time for the job. CNBC’s Jim Cramer believes that Niccol’s emphasis on execution will continue to drive CMG higher as Niccol drives gross margins higher while coping with the increased traffic from a forgiving customer base.
In November, I suggested that CMG would have another big year in 2019, due to its stronger gross margins and same-store sales revival. The company’s Q4 2018 results suggest I wasn’t too far off the mark.
Whether we’re taking revenues, profits, or same-store sales growth, Niccol underpromised and overdelivered in Q4; there’s no reason he won’t continue to do the same in Q1 and beyond.
Digital Gone Wild
In Q4, Chipotle’s digital orders grew by 66% to $158.6 million or 12.9% of sales. To meet the increase in digital orders the company is putting new assembly lines in the restaurants to deal with these orders. Also, it’s testing drive through as a way to improve the online order pickup experience.
America remains a drive-through nation, so anything it can do to drive more sales from its Chipotlanes is good news for investors. Of course, Niccol understands it’s all about execution, so the test is only in ten Chipotle locations, opting to go slow until it’s worked out all of the kinks.
Going forward, Chipotle plans to invest in pickup lanes at new restaurants over store renovations at older stores. What that says is that customers like the new store designs (layout, etc.) and the numbers bear this out.
Digital online ordering is here to stay.
Add to that a delivery business that is faster than most — according to Niccol, Chipotle consistently has one of the best delivery times through DoorDash, its third-party delivery service — and the company’s growth runway is better than most of its peers.
The Bottom Line on Chipotle Stock
Except for the company’s ongoing challenge of rising labor costs — labor inflation expected to rise by at least 4% in 2019 — I don’t see any bumps in the road for Chipotle stock in 2019.
If you own CMG stock, I would continue to hold. If you don’t and want to own a restaurant stock, Chipotle is a great place to start.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
