North America

Earnings Preview: Chipotle Mexican Grill Q2 2017 (CMG)

By: Craig Bowles

Overview

Chipotle Mexican Grill (CMG) is slated to report 2Q 2017 earnings after the close of trading on Tuesday, July 25th. Results are expected by 4:10 p.m. ET followed by a conference call at 4:30 p.m. available through Chipotle Investor Relations.  Chipotle develops and operates fast-casual and fresh Mexican food restaurants.

Outliers & Strategy

Key measures:

  • Earnings Per Share (EPS): The company normally reports a “clean” earnings number. Analyst consensus is $2.21 (range $1.89 to $2.62). (Source: Yahoo! Finance) Consensus was $2.41 three months ago.
  • Revenues: Analyst consensus is $1.19 bln (range $1.15 bln to $1.21 bln).
  • Comparable Store Sales: Q1 was 17.8%.
  • Chipotle’s Price/Sales at 2.7 compares to a 5-year average of 4.5; Price/Book 7.6 compares to a 5-year average of 9.3; Price/Cash Flow 25.1 compares to a 5-year average of 28.9.
  • Analysts view CMG with 12 Buy, 15 Hold, and 7 Sell ratings, according to MarketBeat.com.
  • Insiders bought 1,654 shares in the last three months and bought a net 2,102 shares in the past year. (source: NASDAQ.com) In May 2016, Chipotle increased a $1.9 billion stock buyback program by an additional $100 million and then added another $100 million in January 2017. The company spent $838 million on share buybacks in 2016 or more than double the cash generated in the same period.
  • Chipotle results could impact other quick service restaurant companies, such as Darden Restaurants (DRI), Yum! Brands (YUM), McDonald’s (MCD) and Starbucks (SBUX).
  • Chipotle shares have a 1-day average price change on earnings of 5.82%. Options are pricing in an implied move of 5.45% off earnings.

Recent News

  • 07/20: Several rats were falling from the ceiling during lunch at a Dallas-area Chipotle Mexican Grill, according to a post on CNBC.com.
  • 07/19: Bernstein has an Outperform rating on Chipotle after a restaurant in Virginia was closed after some customers got sick, so efforts to restore its image will go back to square one. Investors will need to be able to trust management’s ability to execute but that will take some work, according to a post on Barron’s.com.
  • 07/17: Mizuho reiterated a Buy rating on Chipotle on the belief that investors are dismissing innovations like its new queso offering, and that while it may not be a breakout quarter, the recent negativity looks like a buying opportunity, according to a post on Barron’s.com.
  • 07/12: Piper Jaffray is favorably biased toward Chipotle. June was a difficult month for restaurants. Stronger trends in the second half of the year, according to a post on Barron’s.com.
  • 07/11: Oppenheimer reiterated a Perform rating on Chipotle and is concerned that the Street is overestimating earnings power beyond 2017, according to a post on Barron’s.com.
  • 07/03: Cowen contends Chipotle’s May price increase may be “more indicative of a catch-up than an act of confidence,” according to a post on Barron’s.com.
  • 06/26: Wells Fargo sees continued pressure on Chipotle from rising commodity prices, according to a post on Barron’s.com.
  • 06/22: SunTrust Robinson Humphrey notes Chipotle has brought catering delivery to about 40% of its stores. This could grow from 2016’s 1% of sales to above 10% and represents a multi-year SSS driver, according to a post on Barron’s.com.

Technical Review

Chipotle shares reached a $758.61 all-time high on August 5, 2015. The stock got down to $352.96 in October 2016, rebounded to $499 by May, and now is testing the low side of the 2016 second-half balance area. (Chart courtesy of StockCharts.com)

Summary

Another food scare for the company has gotten redundant but the Dallas rats was a new one. Chipotle produces mediocre Mexican fast food at premium prices, but is popular with millennials. Analysts are optimistic that Chipotle has turned the corner, so it’s surprising that we don’t see a general shift from neutral to bullish. Previous guidance suggested high single digits for 2017 comp store sales. Rising food costs could pose a problem assuming Chipotle can move beyond E. coli troubles, drug-related charges, and tweets about sex and drugs in an effort to appeal to millennials. Perceived integrity has declined for all industries in recent years, so customers may be more forgiving. Stock buybacks have increased dramatically and insiders have started to buy some shares recently. The company had missed analyst expectations by an average of 37c for three quarters before last quarter’s 33c beat. Estimize consensus for an EPS of $2.24 on revenue of $1.189 bln compares to analyst consensus of $2.21 on revenue of $1.19 bln.

 

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