Chipotle (CMG) Surges 113.2% In a Year: More Room for Growth?

Chipotle Mexican Grill, Inc. CMG focuses on ensuring food safety for customers along with employing various sales-building initiatives to drive traffic and revenues. With a decent share price appreciation, a Zacks Rank #2 (Buy), and a Growth Score of A, Chipotle is currently a profitable investment choice.

Shares of Chipotle have outperformed its industry in the past year. The stock gained a whopping 113.2% compared with the industry’s rally of 18.9%.

Moreover, an upward revision in earnings estimates for 2019 reflects analysts’ confidence in the company’s earnings potential. Over the past 60 days, the Zacks Consensus Estimate for earnings in 2019 has been revised upward by 2.3%. Further, the company delivered positive earnings surprise in each of the trailing four quarters, the average beat being 18.3%.

Let’s delve deeper into other factors that make this stock a solid pick.

Sales-Building Efforts — Key Growth Driver

Chipotle's increased focus on food safety and enhancing customer experience along with various sales-building initiatives bode well. The company is working on strengthening sales growth by shifting its strategy from giveaways, discounts and rewards to new menu items, operational excellence, enhancement of guest experience by retraining workers, technology-driven convenience, and more aggressive brand marketing.

On Jan 2, Chipotle launched its first menu innovation called Lifestyle Bowls for mobile and web orders that resonated well with consumers. It generated over 1.3 billion earned media impressions in the first few days of January.

For 2019, the company’s priorities will revolve around the five key initiatives namely, digital system investments such as pickup shelves, digitized make lines, loyalty and delivery; marketing programs focusing on cooking techniques; and menu innovation and operational excellence.

Chipotle redesigned and simplified the online ordering site, enabled online payment for catering, online meal customizations and collaborated with several well-known third-party providers for delivery.

In the fourth quarter, digital sales grew 66% year over year, marking acceleration from 48% in the third quarter. In 2018, the company created records as digital sales were 10.9% of sales and went beyond $0.5 billion. Also, since the rollout of its “Smarter Pickup Times” technology, there has been a significant increase in digital orders and higher guest satisfaction. In 2018, the company enabled digitized make lines in more than 1,000 restaurants. It expects to roll it out in all restaurants by the end of 2019.

Driven by these major efforts, we expect Chipotle’s top line to grow in 2019. Consequently, the Zacks Consensus Estimate for revenues in 2019 is pegged at $5.3 billion, suggesting 8.7% growth from 2018.

Earnings and Returns Look Promising

Arguably, earnings growth is of utmost importance for determining a stock’s potential as surging profit levels often indicate solid prospects (and stock price gains).

Chipotle’s robust sales trend also aided earnings. In the fourth quarter of 2018, adjusted earnings of $1.72 per share surpassed the Zacks Consensus Estimate of $1.39 by 23.7%. The bottom line also grew 28.4% from the year-ago quarter, backed by increased revenues and lower food costs.

We expect the upside trend to continue throughout 2019. The Zacks Consensus Estimate for earnings in 2019 is pegged at $12.25, reflecting a 35.2% increase from the past year.

Further, Chipotle’s Return on Equity (ROE) for the trailing 12 months is 17.6%, higher than the industry’s 7.5%. This suggests that the company reinvests more efficiently than peers.