Why does Chipotle Stock ($CMG) Become A “Favorite” while other Restaurant Stocks Struggle
Chipotle ($CMG) is one of the few companies in the food services business and has seen strong growth this year. The temporary closure of dining space during the outbreak has put pressure on restaurant companies. However, chipotle has successfully solved these problems by implementing digital production lines, adding “chipotlanes” and expanding delivery partnerships with grubhub.
On Wednesday, Chipotle announced that it would open its 100th Chipotlane later this month. The company plans to use Chipotlanes in 60% of newly opened restaurants. In the first quarter, the company opened 19 new restaurants. Of the new restaurants, 11 have Chipotlanes. During the epidemic, people prefer take-out services rather than dining in restaurants. At the same time, Chipotle invested in digital improvements, which promoted sales development. In the first quarter, Chipotle’s digital sales increased by 80% year-on-year. However, Chipotlanes needs more employees. Therefore, the company plans to hire about 10,000 more employees in the next few months.
When talking about Chipotlanes, Chipotle’s chief restaurant director Scott Boatwright said: “Customers want convenience and want to get orders back in person without leaving the car. With a dedicated team and kitchen dedicated to digital orders, we need to continue to work hard to expand the workforce to support growing demand, especially in areas with Chipotlane.”
Chipotle’s stock performance
In the first quarter earnings conference call, Chipotle’s management stated that even before COVID-19, its restaurants with Chipotlanes performed 5%–10% higher than non-Chipotlane restaurants. Now, the gap has widened to 30%. The announcement about the opening of the 100th Chipotlane strengthened investor confidence and drove the company’s stock price. On Wednesday, Chipotle stock rose to a high of $1,135.66 and then closed at $1,133.65. The stock is up 2.8% from the previous day’s closing price.
At the same time, Chipotle’s year-to-date return is 35.4%. The company’s performance is better than McDonald’s ($MCD), Shake Shack ($SHAK) and Starbucks ($SBUX), which fell by 3.0%, 14.3% and 14.0% respectively. Earlier this month, Shake Shack provided a disappointing business update.
Chipotle shares have risen more than 170% from their March lows. The stock price increase also increased the company’s valuation multiples. At present, the company’s trading price is 121 times the analysts’ 2020 EPS forecast of $9.18 and analysts’ 2021 EPS of $19.06, 59.4 times. These expectations represent a year-on-year decrease of 33.3% in 2020 and a year-on-year increase of 103.3% in 2021. Although chipotle’s valuation multiples look expensive, I think that’s reasonable given the the shift of consumer behavior on healthy diet and thus company’s growth potential. Chipotle would announce its second quarter earnings on July 22. Let’s look forward to the earnings report.
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