Wall Street Finds New Reasons to Love the Big Burrito (CMG)

January 4, 2012 12:57 PM EST
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Price: $409.74 +0.95%

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Even though shares of Chipotle Mexican Grill (NYSE: CMG) rose 59% throughout 2011, Wall Street is finding new reasons to fall in love with the fast food chain.

Chipotle has received two upgrades in as many day, one from Deutsche Bank Tuesday and one from Goldman Sachs on Wednesday.

Goldman added the stock to its coveted Conviction Buy List and lifted its price target from $390 to $410, arguing investors will pay up for the EPS upside and 30-40% growth.

Chipotle has just scratched the surface on growth, Goldman says. The firm estimates total potential US units of around 3,500, meaning they only have around 30 percent penetration at this point. Supporting this view, Goldman notes that U.S. brand awareness is still low at only 60 percent, average sales per restaurant and traffic are still increasing at a rapid pace, return on capital continues to rise, and new store productivity is stable and robust.

Earnings should grow 35-40 percent this year, and the firm estimates 2012 EPS of $9.39 which is nearly 9 percent above the consensus of $8.63. Goldman also sees upside to both same store sales and profit margins as lower food cost work their way through and fixed cost leverage continues.

Goldman sees a low likelihood of multiple compression given the company is in the early stage of the growth life cycle at 1,200 units out of a 3,000-4,000 unit potential, the magnitude of potential EPS upside, and the historical precedent set by prior "hyper growth" restaurant stocks.

Deutsche Bank made similar comments in its upgrade of Chipotle Mexican Grill yesterday. Deutsche Bank's analyst said, "CMG remains the best growth story in the restaurant industry given a 13% unit growth rate, industry-leading same store sales, industry-leading new unit returns, and a long runway for new stores. 2012 also sets up as a better year for earnings growth than 2011, as easier cost compares + higher menu pricing = a better margin outlook."

Shares of CMG are up 2.2 percent to $348.64.

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