Since Chipotle’s stock slides, analysts ask if its valuation has peaked

Since Chipotle's stock slides, analysts ask if its valuation has peaked - us-canada

Shares of Chipotle Mexican Grill dropped 4 percent in trading Wednesday, despite devastating earnings estimates and reporting its greatest same-store earnings growth in over two decades.

Analysts are pointing to the stock’s high valuation.

In the previous year, the stock has surged 84percent to $797 per share, giving it a market value of $23 billion. The average analyst price target for Chipotle shares is $844. 22, based on Refinitiv. The stock hit a record high in July and kept climbing, peaking at $857. 90 a share in early September.

Chipotle’s stock is trading at almost 49 times its forward earnings estimates and 64 times its former 12-month earnings, according to Refinitiv.

Its rivals in the restaurant industry have lower price-to-earnings ratios. Shares of Yum Brands, the parent company of Taco Bell, and Starbucks exchange for 26 times every corporation’s forward earnings, Refinitiv statistics reveal. After McDonald’s shares slid Wednesday on its lackluster third-quarter earnings, the restaurant giant’s stock is trading for 23.6 times its forward earnings.

Jack in the Box, which has a market value of $2.2 billion, has approximately 300 fewer shops than Chipotle and lags its annual earnings by roughly $300 million. The fast-food chain’s stock trades for 17 times its forward earnings, based on Refinitiv.

Morgan Stanley analyst John Glass wrote in a note that Chipotle’s share price has quickly outpaced earnings estimates for financial 2020, indicating that investors are providing Chipotle credit for its functionality “well in advance.”

Since Chipotle's stock slides, analysts ask if its valuation has peaked - us-canada

“Now, with a dynamic of tougher compares and potentially moderating same-store sales in 2020, we think that valuation will start to matter more,” Glass said.

Jefferies analyst Andy Barish wrote that he considers Chipotle’s same-store sales growth and profit margin drivers are already reflected in the inventory.

Among Chipotle’s margin drivers is its own “Chipotlanes” — drive-thru lanes for electronic order pick-up. The company announced Tuesday that it would be installing Chipotlanes in over half of its stores under construction. Pick-up orders have higher margins, but the longer construction times imply that some store openings could be delayed into 2020.

Investors focused on the decrease in 2019 store openings, in addition to higher-than-expected labour costs, according to Cowen analyst Andrew Charles.

“While we don’t see these as long-term issues, the heated inventory response to [Chipotle’s] strong 3Q results might be indicative that valuation has surfaced,” Charles wrote in a note to clients.

The organization’s stock has been on a tear for the past year and a half after Brian Niccol became Chipotle’s new chief executive. In July, following its stock surpassed a high set before its food safety problems, some said Chipotle’s woes were firmly in the past.

“We believe the company’s cultural reset and heightened level of accountability are critical drivers of ongoing and future performance,” Piper Jaffray analyst Nicole Regan Miller wrote Wednesday.

Beneath Niccol’s direction, Chipotle has been growing digital sales and shifting its menu up.

For instance, Chipotle’s limited-time launching of carne asada, which is 50 pennies pricier than its priciest protein, boosted sales during the next quarter. The series’s supply is expected to run out in late November or early December, executives said.

Bernstein analyst Sara Senatore said that Chipotle’s advertising for carne asada drove overall brand recognition. Menu items which are in the pipeline could eventually do the same.

“With further menu innovations — salad, beverages, quesadillas, improved queso — still to come, we see a long runway for comps,” she wrote, referring to the prospect of additional same-store sales growth.

Since Chipotle's stock slides, analysts ask if its valuation has peaked - us-canada

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