It's a good time to be an investor in Chipotle Mexican Grill (NYSE:CMG). The fast-casual maker of Mexican fare hit new all-time highs after reporting second quarter earnings that blew past expectations. In the wake of that blowout financial report, analysts have been quick to revise their price targets and upgrade Chipotle.
For the second time this week, Chipotle has earned good reviews from an analyst, with both concluding that Chipotle stock is headed significantly higher. Let's take a look at their rationale to see if investors should climb aboard.
The highest on Wall Street
Earlier this week, Goldman Sachs initiated coverage on Chipotle, giving the company a buy rating and slapping a $1,000 price target on the stock. Analyst Katherine Fogertey pointed to the company's digital initiatives as a compelling catalyst to drive the stock higher.
"By ﬂexing their digital muscle and migrating customers to this channel, the company is able to grow capacity in the stores well beyond prior "peak" in 2014 as well as grow frequency and spend potential," Fogertey said in a note to clients Monday.
The analyst has a point. Digital sales has become an area of increasing focus for Chipotle, and those efforts are paying off. When Chipotle released its Q2 earnings last week, revenue increased to $1.43 billion, up 13% year over year. The better-than-expected performance was the result of a 10% increase in comparable sales and a 3.5% boost in the average ticket. The biggest contributor was a 99% increase in digital sales, which now accounts for more than 18% of total sales for the quarter.
Chipotle is in the process of revamping its restaurants to create a second preparation area or "digital make lines" in more than 2,000 locations to help expand its digital sales. The company also enhanced the capabilities of its app and focused on delivery through a variety of services to accommodate the transition. If you have any doubts about how serious Chipotle is about these initiatives, it's worth noting that digital came up 40 times during its second-quarter conference call.
Increasing price target
On Wednesday, Piper Jaffray analyst Nicole Miller Regan jumped on the bandwagon, reiterating Chipotle's overweight (buy) rating, and raising the stock price target to $900, up from $824, and 13% higher than its current level. In a note to clients, Regan writes that she has a "high degree of conviction around Chipotle shares" and she remains "confident that Chipotle is positioned to support recent top-line momentum and, over time, drive potential upside to consensus expectations."
The analyst listed a host of catalysts that could help the stock continue its rally, citing store-level sales as one prominent example.
Last year, Chipotle generated $777 in sales per square foot of restaurant space. This is nearly 10% higher than its restaurant peers in the fast-casual dining space. While that's impressive, it's also significantly lower than the peak levels Chipotle reached in 2014 at about $958 per square foot. Chipotle will likely be able to retake those levels again as the company becomes more efficient with its price levels and increases sales in each location.
Regan has a positive track record regarding Chipotle, and her opinion shouldn't be taken lightly. In May 2018, the analyst called Chipotle a top pick: "When, and as (not "if") the recovery unfolds, meaningful leverage exists," Regan wrote at the time, adding that the stock could top $530 in the coming 12 months, a 25% upside from the then-current price. The analyst raised her price numerous times in the ensuing year. Chipotle has obviously achieved her original goal and much more, with a price recently near $800.
The sky's the limit for Chipotle
Chipotle has had a remarkable run since bottoming in early 2018. The stock has since more than tripled in value as its recovery takes hold, digital sales continue to accelerate, and same-store sales reach impressive levels. The company's recent initiatives continue to bear fruit and will likely drive Chipotle to new heights.