Chipotle Mexican Grill (CMG) Ramps Higher as RBC Capital Sees Plenty of Upside
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Price: $2,940.00 +0.11%
Rating Summary:
31 Buy, 15 Hold, 1 Sell
Rating Trend:
Down
Today's Overall Ratings:
Up: 8 | Down: 12 | New: 50
Rating Summary:
31 Buy, 15 Hold, 1 Sell
Rating Trend:
Down
Today's Overall Ratings:
Up: 8 | Down: 12 | New: 50
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Shares of Chipotle Mexican Grill (NYSE: CMG) are 2.7% higher mid-day Tuesday amid positive commentary from RBC Capital analyst David Palmer, who highlighted food value and pricing power at the company following meetings with management.
"We recently hosted meetings with Chipotle management and came away with increasing confidence in the company's ability to sustain its recent momentum," Palme said. "We believe its strong food and people culture, combined with improved marketing, throughput efforts, and perceived pricing power, will contribute to sustainable ~25%+ EPS growth.
Palmer sees exciting times at Chipotle as the company widens its growth gap relative to the industry. He believes this outperformance is sustainable given: 1) improved marketing (e.g., on-line video content, billboards, local store marketing); 2) throughput initiatives; 3) catering (~1pp to SSS); and 4) a broadening of the restaurateur program. The analyst also said certain values in food have increasingly been going mainstream, including a desire for simple ingredients, protein, fresh, and GMO-free. These all favor Chipotle, he said.
The analyst sees Chipotle implementing a mid-single-digit price increase in 2014, although they no longer see the price increase coinciding and linked with the GMO-free announcement. "The cost of converting the menu to GMO-free is proving to be less of a burden than expected," he said. Still, according to the analyst, "[t]he company will likely be aggressive in telling consumers about its GMO-free food since this will be a sustainable differentiator."
RBC's $750 per share upside scenario is fueled by pricing power. The analysts' base case valuation assumes 7% and 6% SSS growth in 2014 and 2015, translating to 24% and 31% EPS growth in 2014e and 2015e, respectively. Their upside scenario ($750 value) includes 8% and 7% SSS growth in 2014e and 2015e, leading to 31% and 37% EPS growth, respectively. This upside scenario includes 185bp of restaurant margin expansion in the 12 months following a price increase, although they said this could prove conservative if: a) pricing is above our 4% estimate; b) input inflation does not meaningfully accelerate; and c) price elasticity proves to be low.
Lastly, Palmer believes the company's domestic unit potential may go "well above" initial targets of 3,000–4,000. Also, new concepts Pizzeria Locale and ShopHouse remain future areas of growth. "We believe Pizzeria Locale represents an opportunity to reinvent the pizza category with high quality pizza at an affordable price," he said.
The firm maintained an Outperform rating and price target of $650 on CMG.
For an analyst ratings summary and ratings history on Chipotle Mexican Grill click here. For more ratings news on Chipotle Mexican Grill click here.
Shares of Chipotle Mexican Grill closed at $576.26 yesterday.
"We recently hosted meetings with Chipotle management and came away with increasing confidence in the company's ability to sustain its recent momentum," Palme said. "We believe its strong food and people culture, combined with improved marketing, throughput efforts, and perceived pricing power, will contribute to sustainable ~25%+ EPS growth.
Palmer sees exciting times at Chipotle as the company widens its growth gap relative to the industry. He believes this outperformance is sustainable given: 1) improved marketing (e.g., on-line video content, billboards, local store marketing); 2) throughput initiatives; 3) catering (~1pp to SSS); and 4) a broadening of the restaurateur program. The analyst also said certain values in food have increasingly been going mainstream, including a desire for simple ingredients, protein, fresh, and GMO-free. These all favor Chipotle, he said.
The analyst sees Chipotle implementing a mid-single-digit price increase in 2014, although they no longer see the price increase coinciding and linked with the GMO-free announcement. "The cost of converting the menu to GMO-free is proving to be less of a burden than expected," he said. Still, according to the analyst, "[t]he company will likely be aggressive in telling consumers about its GMO-free food since this will be a sustainable differentiator."
RBC's $750 per share upside scenario is fueled by pricing power. The analysts' base case valuation assumes 7% and 6% SSS growth in 2014 and 2015, translating to 24% and 31% EPS growth in 2014e and 2015e, respectively. Their upside scenario ($750 value) includes 8% and 7% SSS growth in 2014e and 2015e, leading to 31% and 37% EPS growth, respectively. This upside scenario includes 185bp of restaurant margin expansion in the 12 months following a price increase, although they said this could prove conservative if: a) pricing is above our 4% estimate; b) input inflation does not meaningfully accelerate; and c) price elasticity proves to be low.
Lastly, Palmer believes the company's domestic unit potential may go "well above" initial targets of 3,000–4,000. Also, new concepts Pizzeria Locale and ShopHouse remain future areas of growth. "We believe Pizzeria Locale represents an opportunity to reinvent the pizza category with high quality pizza at an affordable price," he said.
The firm maintained an Outperform rating and price target of $650 on CMG.
For an analyst ratings summary and ratings history on Chipotle Mexican Grill click here. For more ratings news on Chipotle Mexican Grill click here.
Shares of Chipotle Mexican Grill closed at $576.26 yesterday.
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