Shares of Chipotle Mexican Grill (CMG -0.31%) have surged this year, climbing 36%. This gain crushed the S&P 500's 19% gain over this same time frame. But one analyst thinks the stock could rise even higher.
Last Thursday, Piper Sandler analyst Nicole Miller Regan boosted her 12-month price target for Chipotle Stock to $2,235 -- up from a previous view for shares to climb to $2,100. In addition, she reiterated her overweight rating (similar to a buy rating) for the stock.
Her target is the highest on the Street. Here's a closer look at why she's so bullish on the growth stock.
Chipotle is "people ready"
Human labor is becoming the latest hot commodity in short supply. But Chipotle acted shrewdly a few months ago to spice up the value proposition for working for the company, increasing its hourly wages and laying out a path for employees to earn a six-figure salary in as little as three and a half years. In addition, the company rolled out referral bonuses ranging from $200 to $750, depending on the position hired.
This aggressive hiring effort is working. Chipotle CEO Brian Niccol said in the company's second-quarter earnings call that the fast-casual restaurant has hired thousands of employees, positioning the company to both "meet current demand and accommodate future growth."
"These efforts have dramatically helped to improve our labor position," explained Niccol, "and as a result, our restaurants are attracting and retaining excellent employees in a tough labor environment."
Echoing this sentiment, Miller Regan said in her note to investors about her Chipotle stock price target increase that the fast-casual restaurant operator is "people ready." Thanks to the company's timely and aggressive hiring, Chipotle is positioned to reach or exceed its guidance for opening about 200 new stores this year.
Equally important to Miller Regan's increased confidence in Chipotle is the company's bottom-line strength. Her higher price target reflects higher earnings estimates, including a view for annual earnings per share to reach about $46 by 2023. This is more than double the company's $20.57 in trailing-12-month earnings per share today.
The company's most recent quarterly results do a good job of highlighting the company's exceptional earnings momentum. Revenue in the period rose about 39% year over year to $1.9 billion. Earnings per share soared from $0.40 in the year-ago period to $7.46 -- and that's after an adjustment for unusual items. This outsize earnings growth was driven by a combination of the company's revenue growth and a restaurant-level operating margin that more than doubled, rising from 12.2% in the year-ago period to 24.5%. Lower promotional costs helped, too.
Of course, Chipotle faced an easy year-ago comparison since it was facing a pandemic head-on in the second quarter of 2020. So the degree of Chipotle's top- and bottom-line momentum is unlikely to be sustained. But analysts agree that earnings will grow at extraordinary rates over the next five years. On average, analysts are modeling for earnings per share to increase at a compound average annual growth rate of 55% over the next five years.
So while Chipotle's price-to-earnings ratio of 92 may seem expensive on the surface, investors should realize that this business has some extraordinary momentum. As Miller Regan argued last week in her note to investors, a premium valuation is easily justified.