One of the restaurant industry's biggest boom-to-bust stories is staging a quiet recovery. Shares of Chipotle Mexican Grill (CMG +2.55%) have risen 26% since bottoming out two months ago. Analysts are jacking up their price targets, including a pair of moves this week.
Nomura Instinet is bumping its price goal from $291 to $315. Wells Fargo is raising its target from $280 to $300. This doesn't mean these Wall Street pros are bullish. Their new price marks are actually lower than where Chipotle stock is currently trading. However, momentum is lifting the perceived value of Chipotle and analysts raising their targets is just part of the art of playing along.
Image source: Chipotle Mexican Grill.
Earning a turnaround
Chipotle reports quarterly results next week, and it's not as if Tuesday's analyst updates are ringing endorsements. Nomura Instinet is actually lowering its profit and comps forecasts for the fourth quarter, concerned about the weakening brand in the marketplace. Wells Fargo's update points out that Chipotle continues to struggle to win back customers. With price target hikes like these, who needs enemies?
The problem with the former fast-casual darling is that it's still far from where it used to be when margins peaked in 2014 and earnings topped out in 2015. However, everything seems to be falling into place for a gradual stock recovery even if the concept is a shell of what it used to be.
It's a kind operating climate these days, despite the echoes of "restaurant recession" fading. Folks are eating out again, even if it means eating in. McDonald's, the world's largest burger chain and former Chipotle parent, just pulled off its strongest comps in six years in Tuesday morning's earnings report. The popularity of restaurant-delivery platforms is giving eateries a second act as proprietors of takeout for home- or office-bound millennials. An improving economy and buoyant stock market are working wonders for stocks of consumer-facing companies, and for now that just happens to also include Chipotle.
One can argue that Chipotle doesn't deserve its 26% pop since bottoming out in mid-November. Comps rose a mere 1% in its latest quarter, but that followed a 22% drop a year earlier during the same period. Expansion and higher prices will eventually push total revenue to record levels, but Chipotle will take a lot longer than that to be as profitable as it was when its stock peaked in 2015.
Chipotle stock wasn't going to go down forever. Investors earned a break after seeing the shares suffer double-digit percentage declines in 2016 and again in 2017. However, it's not any closer to solving its problems than it is to finding a new CEO or fixing its queso. Chipotle may never achieve the same kind of cult status it had before the E. coli outbreaks, but it has more to do with everybody else copying the assembly line bowl-building concept than the fact that a few dozen people got really sick after eating at Chipotle.
Next week's report isn't likely to be special, but in a market where even mediocre performers are being rewarded with hearty stock gains, Chipotle isn't going to complain. It can ride the tide higher, but sooner than later it will have to earn those gains.
