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Chipotle’s share price is flaming hot, but is there any upside left?

Chipotle Mexican Grill’s [CMG] share price has had a stellar 2019, reaching an all-time high of $843.64 in August and almost again last week when it closed at $843.29 (23 September). So, is there still room to trade the stock?

The Mexican casual dining chain has seen spectacular gains this year, cementing its years-long recovery after E.coli outbreaks at key branches were first reported in 2015. The company’s share price is now on the up having surged by 84.69% this year.

Since the 23 September peak of $843.29, shares have dropped by 2.9% to $818.83. However, some analysts have speculated that Chipotle’s share price could grow up to $1,000, representing an 19.35% upside based on the current price.

 

The stock may be overvalued

Chipotle has a forward PE ratio of 48.04, which has led some to see it as overvalued. “Its industry sports an average forward P/E of 23.8, so we one might conclude that CMG is trading at a premium comparatively,” Zacks Equity Research reports.

While Growth Investor’s Louis Navellier says that the chain is undeniably overbought, he states that “there’s plenty of reasons to still like the stock, or, if you haven’t gotten into it yet, to get in now”.

One reason, for instance, is that many are expecting an additional pop for the company when Chipotle reports its Q3 results on 22 October, when analysts expect the company to post earnings of $3.15 per share, according to Zacks Equity Research.

 

Market cap $23.15bn
PE ratio (TTM) 94.19
EPS (TTM) 8.87
Return on Equity (TTM) 17.02%

Chipotle share price vitals, Yahoo finance, 30 September 2019

 

What’s ahead?

For the time being, Chipotle has fallen by 1.09% since the start of the month. This puts it well below the the Retail-Wholesale sector’s gain of 2.71% and the S&P 500’s gain of 3.85% in the same period, figures from Zacks Equity Research show

Some of this could be contributed to new claims made this week that the company violated New York City’s labour laws by failing to provide workers’ schedules at least two weeks in advance, and for failing to pay premiums for last-minute schedule changes. 

However, a string of factors hint that the stock could spike again.

Wedbush analyst Nick Setyan, was recently reported as upgrading his rating of the stock from neutral to a buy and setting a price target of $980. He points to Chipotle’s ability to create a “digital moat” as reason to expect a pop towards the end of the year as the company transitions to “a larger mix of digital transactions”.

Furthermore, writing on Unseen Opportunity Bill Poulos suggests that Chipotle’s recent decision to partner with food delivery services such as DoorDash may well lead its digital sales to push up the company’s earnings.

Zacks Consensus Estimates project Chipotle will deliver earnings of $13.36 per share and revenue of $5.49bn for the full year. This would represent respective increases of 47.46% and 12.81% from the previous year. Undoubtedly, this would provide a boost for the stock in coming months.

47.46%

Estimated earnings per share increase year-over-year

 

Bullish sentiment?

Buying a stock at record highs has not been a good move traditionally. However, this doesn’t seem to be deterring Chipotle bulls.

At the start of September, StreetInsider reported that Piper Jaffray analyst Nicole Miller Regan raised the chain’s target price to $904 from $900 and maintained an ‘overweight’ rating on the stock, echoing Setyan’s stance, while Zacks Rank also rates the stock as a ‘buy’.

$752.50

Median 12-month price target

Miller Regan reiterated that momentum among the company’s TV and digital advertising, digital and delivery sales and the company’s growing loyalty programme, justify the price target.

CNN states, however, that the current consensus among 34 polled investment analysts is to ‘hold’ the stock, and this has remained steady throughout September. 

It also notes a $752.50 median target price from 28 analysts offering 12-month price forecasts – with a high estimate of $1000 and a low estimate of $525. At the current price - $834.94 -, the median target suggests a 9.9% fall in the long-term, signifying that there may well be a tapering of the stock’s growth yet.

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