Can Chipotle Stock Keep Going After Last Week’s 29% Pop?

One of last week’s biggest winners was Chipotle Mexican Grill (NYSE:CMG), soaring 28.7% after posting better-than-expected financial results. The burrito roller is still in the early stages of a turnaround, but the market clearly likes the direction the chain is taking since tapping Taco Bell’s CEO to be its new helmsman. Chipotle stock has now soared 70% since announcing that Brian Niccol would be its new CEO two months ago. 

Revenue rose 7.4% to hit $ 1.148 billion in Chipotle’s first quarter, with expansion and a 2.2% uptick in comps combining for the top-line lift. This is the chain’s third straight quarter of single-digit revenue growth, but this time it’s pitted against a 28.1% surge — its strongest quarter since the summer of 2014 — a year earlier. Margins widened, and earnings per share rose by a better-than-expected 33% to clock in at $ 2.13. 

Chipotle employees sitting at a table and look at their laptops.

Image source: Chipotle Mexican Grill.

Wrapping things up

Chipotle’s well-received quarter wasn’t perfect. The driving force behind the positive comps was a 4.9% gain in the average check, largely as a result of menu price increases. In other words, the actual number of customers in that 2.2% rise in comps has actually declined.

The $ 1.148 billion in revenue is a record for the first quarter, but the only reason it’s topping 2015’s performance is expansion. The chain has grown by 610 locations over the past three years. Unit-level sales remain well below where they were three years ago. Margins and earnings are also a sliver of what they used to be. Chipotle’s per-share profit of $ 2.13 is a little more than half the $ 3.88 it was sporting during the first quarter of 2015. 

Most analysts still warmed up to the report. Chipotle may not be doing as well as it was three years ago, but it’s clearly taking steps in the right direction. Several Wall Street pros jacked up their price targets following the report, even one who downgraded the stock. Stephen Anderson at Maxim lowered his rating from buy to hold following the stock’s rally, yet he still raised his price goal on the stock from $ 410 to $ 435. Anderson argues that the stock’s sharp ascent over the past several weeks introduces more downside risk. 

It’s true that Chipotle isn’t a 70% better company than it was when it announced Niccol was taking over in mid-February, but the stock still trades 44% below its all-time high set in 2015. Chipotle has made mistakes — a lot of mistakes — but it’s back on track. Now it’s up to Niccol to introduce the operating improvements to beef up margins and the innovation to get traffic growing again.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

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