Chipotle Mexican Grill (CMG 0.40%) continues to gain momentum with investors in 2021. The stock is up 35% year to date and, looking back long-term, the stock is up about 341% in the last five years. The company is making investors wealthier, so it's really no surprise that some investors are interested in acquiring shares of this strong performer.
However, I am going to suggest that this week it might be best to avoid buying shares of Chipotle. The company is scheduled to report third-quarter earnings on Thursday, Oct. 21. Typically, there can be increased volatility in stock prices around the time of an earnings release, especially when it involves a growth stock.
Given that there are high expectations for Chipotle heading into that latest report and given the challenges that continue to be raised by the coronavirus pandemic, waiting until after the report's release to buy Chipotle stock is probably going to be beneficial. Let me explain.
Image source: Getty Images.
Expectations are high, but risks abound
Analysts on Wall Street expect Chipotle will report quarterly revenue of $1.93 billion and earnings per share of $6.31 in Thursday's earnings release. Those estimates would be increases of 20% and 67%, respectively, from the same quarter last year. Indeed the market is projecting a healthy bounceback from last year's pandemic-disrupted figures.
However, there are a few risks that could cause Chipotle to report lower-than-expected results. For one, the pandemic is causing worldwide shortages of commodities, and if Chipotle had difficulty stocking critical ingredients for its products, it would have harmed sales in the quarter. Another is widely reported shortages of workers. The labor shortage could hit Chipotle by leaving restaurants understaffed and raising expenses -- each has the potential to lower earnings per share.
The challenges can be tough for a company with stagnating sales, but they are even more difficult for a business with growing demand and expanding locations. Not only does Chipotle need to secure ingredients and labor for existing stores, but for the 200 additional stores, they plan to open by the end of the fiscal year.
Good prospects could be priced into Chipotle stock
The rise in Chipotle's stock has it trading at a price-to-free-cash-flow ratio of 101, near the highest in the last decade. Paying premium prices for a stock can have added risks when the company faces near-term challenges the way Chipotle is.
Chipotle's stock was already achieving solid gains in the previous few years, and it further juiced this year when management raised its long-term adjusted unit volume target (annual sales for each store) by 20% from $2.5 million to $3.0 million.
The increase boosted enthusiasm for Chipotle stock because it has significant implications. The company currently has 2,853 stores and is projecting it can grow to have 6,000 locations in North America alone. If you multiply a $500,000 per store increase in annual revenue by 6,000 stores, that raises its potential yearly revenue by $3 billion. It's no wonder then that Wall Street is excited about Chipotle stock.
Since most of the good news appears to be priced into Chipotle's stock and the downside from supply chain disruptions and labor shortages are not as well known, it may be prudent to wait for Chipotle to reveal this quarters' results before buying the stock. That way, you can better assess the dollar figure and the duration of the near-term headwinds that Chipotle is enduring.
