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Chipotle Mexican Grill Has a Lot to Prove This Week

By Rick Munarriz - Jul 22, 2019 at 11:55AM

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The fast-casual chain is hitting all-time highs just as it clears the way for a critical second-quarter report on Tuesday.

Chipotle Mexican Grill ( CMG -2.52% ) hit all-time highs late last week, a feat that may have seemed unfathomable early last year when the stock bottomed out after shedding more than two-thirds of its value since peaking in the summer of 2015. With food safety concerns percolating and a new wave of fast-casual competitors emerging, it didn't seem likely that Chipotle stock would more than triple to establish a new high-water mark 17 months later -- but it did. 

The challenge now for Chipotle is to sustain these fresh highs, and investors won't have to wait long for the next big test. The resurgent burrito chain reports its second-quarter results this week, shortly after Tuesday's market close. 

A Chipotle burrito in a plastic basket next to an order of chips and a cup of guacamole.

Image source: Chipotle Mexican Grill.

Order up

Analysts see revenue rising 11% to hit $1.41 billion for the quarter, making this the third consecutive period of double-digit percentage growth on Chipotle's top line. It may not seem like much of a streak, but you have to go all the way back to the third quarter of 2015 -- when Chipotle stock peaked before its recent revival -- to find the last time that revenue clocked in with double-digit growth for at least three straight quarters. 

Investors are counting on an even bigger step up on the bottom line. Wall Street pros are targeting a profit of $3.77 a share for the quarter, up sharply from the $2.87 a share it earned a year earlier adjusted for one-time items. The bad news is that Chipotle's earnings growth is coming off of depressed showings the past couple of years. As impressive as the 31% year-over-year surge in earnings per share may seem, we're still below the $4.45 a share it posted in the same period back in 2015 when we were at peak Chipotle. 

The good news here is that Chipotle has consistently beaten Wall Street's quarterly profit forecasts on the way to the stock more than tripling since early 2018. With the stock rallying heading into Tuesday's report it would be a disappointment if it doesn't land well above $3.77 a share in adjusted profitability. 

There are a lot of moving parts to the Chipotle story, giving it many levers that will dictate how the market reacts to this week's report. The chain boosted its full-year guidance last time out, lifting its comps guidance from mid-single digit growth to a "mid to high single digit" performance. It also bumped the number of new eateries it expects to open for all of 2019 from 140 to 155. Another positive revision would naturally be a juicy catalyst for more all-time highs. Sticking to its current guidance could trigger some profit taking given the inflated stock price levels. 

Chipotle can also impress the market by firming up details for new products or providing some more enrollment and usage color for the loyalty rewards program it launched nationally in March. On the food front, testing for carne asada as a new protein option and installing new ovens that could broaden its menu offerings are still waiting for their official chainwide rollouts.

Chipotle has come a long way since bringing over Taco Bell's head to run the show, and investors have been rewarded handsomely. The expectations are high now, and that's why Chipotle can't afford anything less than another blowout financial performance this week.     

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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