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Chipotle (NYSE: CMG) is Well-Positioned for Post-Pandemic Prosperity

Friday, September 11, 2020 | Nick Vasco
Chipotle (NYSE: CMG) is Well-Positioned for Post-Pandemic ProsperityThe headline numbers in Q2 2020 didn’t look too good for Chipotle (NYSE: CMG) Sales dipped 4.8% yoy and comps decreased by 9.8% yoy. But Chipotle’s numbers compare favorably with its peers and there are several reasons to believe that Chipotle will see rapid growth post-pandemic.

Comps Got Better as Q2 Progressed

Three months ago, Wedbush Securities Analyst Nick Setyan projected that Chipotle’s comps would dip 9% in Q2. He projected a better Q2 than most Chipotle analysts at the time, and he came pretty close.

Comps improved as Q2 progressed with April down 24% yoy, May down 7% yoy, and June increasing 2% yoy. At the time of the Q2 earnings call, July comps were up 6.4% month-to-date compared to the same period a year ago.

Even though Chipotle is not providing guidance on comps for the remainder of 2020, it’s reasonable to expect its performance in the second half of 2020 to look more like June/July than April/May. And improving comps aren’t the only way that Chipotle is going to increase its sales.

Expansion Could Be Bigger Than Previously Predicted

Chipotle CEO Brian Niccol recently came out and said that he believes Chipotle can eventually open 6,000+ restaurants, substantially higher than the previous estimate of 5,000 potential stores.

Chipotle currently has around 2,700 restaurants, so that would represent a 122%+ increase.

Look at a restaurant chain like McDonald’s, with its 37,000+ restaurants, and you realize that 6,000+ restaurants aren’t even all that much.

Chipotlane is the Future

Chipotlane, which is a drive-thru pick-up lane that is part of some Chipotle restaurants, has the potential to boost Chipotle’s revenue growth.

Pre-pandemic, Chipotle planned to include Chipotlane in 50-60% of its new stores.

Now, Chipotle plans to include a Chipotlane in more than 60% of its new restaurants in 2020 and 70%+ in 2021. In Q2, Chipotle opened 37 new restaurants – 21 had a Chipotlane, which works out to a shade under 57%.

It’s easy to see why management wants to utilize Chipotlane. On the Q2 earnings call, CFO John R. Hartung noted, “Of the 13 Chipotlane that are in our comp base and therefore opened well before COVID, sales were over 10% higher than the non-Chipotlane comp restaurant from the same opening period while the more recent openings during COVID are actually 30% higher.”

Digital Trends are Encouraging

In Q2, digital sales increased 216% yoy to $829 million, accounting for 61% of sales. That came on the heels of Q1, when digital sales increased 80% yoy, making up 26.3% of revenue.

Chipotle’s customer loyalty program also recorded a nice increase in Q2 – perhaps unsurprisingly. The program now has nearly 15 million members, up from 11.5 million members at the end of Q1.

Even more encouraging is “since sales troughed in late March, we've been able to retain 70% to 80% of our digital sales gains while recovering 40% to 50% of our in-store sales.”

It’s great to see that dine-in gains are not being met with equivalent losses in digital.

Valuation is Lofty… But Still Reasonable

Back in June, I said that Chipotle was a solid value despite being expensive based on traditional metrics, due to its massive growth potential.

Shares are now around 22% more expensive than they were back then, but the Q2 earnings report makes me even more of a believer.

Chipotle simply has so many sources of upside. To recap, there is:

  • Potential for 122%+ expansion.
  • Chipotlane comps bode well for the future.
  • Strong digital business that is maintaining a good chunk of its gains despite return of dine-in.

So even at around 122x forward earnings and, looking a year-out, 63x earnings, I’m still a buyer.

Wait for a Consolidation and Breakout

I like the fundamentals on Chipotle, but the chart has some work to do. Although shares have moved from overbought to neutral territory on the RSI, CMG is long-term extended.

Chipotle (NYSE: CMG) is Well-Positioned for Post-Pandemic Prosperity

Furthermore, shares spent the month of August drifting upwards on light volume. That’s not a long-term issue, but it shows a near-term lack of conviction and strength for the bulls. Now, Chipotle has dipped, along with a lot of other stocks, over the past week.

I’d look for a consolidation of at least 4-6 weeks, followed by a convincing breakout, before getting in.

Companies Mentioned in This Article

CompanyBeat the Market™ RankCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Chipotle Mexican Grill (CMG)1.5$1,252.40-0.7%N/A139.00Buy$1,165.94
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6 Stocks Riding the Coattails of Nikola Motor

Since its initial public offering on June 4, shares of Nikola (NASDAQ: NKLA) have surged over 130%. NKLA stock has cooled down since then and is now trading at just over a 60% premium from its IPO price of $34 per share.

Nikola isn’t alone. The entire electric vehicle (EV) market is on a tear. In addition to the surge in Nikola stock, Tesla (NASDAQ: TSLA) stock is up over 93% and Nio (NYSE: NIO) stock has climbed nearly over 160% in the same time period. But while Tesla and Nio are actually producing cars, Nikola does not even have a plant built.

With all that said, the allure of Nikola is easy to see. The company is planning on building a fleet of hydrogen fuel cell trucks powered by hydrogen fueling stations from sea to shining sea. At least that’s the plan. But that plan is years away. The company won’t even have a fuel cell truck available until 2023 at the earliest.

And while the United States has 39 hydrogen fueling stations, it’s an expensive, complicated venture. But that’s been the problem with hydrogen for nearly two decades. And that has some investors wondering what the company’s chief executive officer (CEO) Trevor Milton is really selling.

Leaving aside the question of whether Nikola is riding the coattails of Tesla, Nikola is beginning to create some significant coattails of its own. And there’s a reason for this. While Nikola is planning to compete with Tesla in the electric car arena, it’s also covering a specific niche with a semi-truck that will run on a hydrogen fuel cell.

View the "6 Stocks Riding the Coattails of Nikola Motor".

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