Chipotle Continues on Rocky Path as Earnings Slide
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Elevator Pitch
I rate Chipotle Mexican Grill, Inc.'s (NYSE:CMG) shares as a Hold. My previous article for CMG published on August 11, 2021 analyzed the pros and cons of a stock split, and I came to the conclusion that a stock split for Chipotle is "unlikely and unnecessary." As of the time of writing, there are no indications that CMG is considering a stock split. In the current article, I discuss the business and share price outlook for Chipotle in 2022.
A substantial appreciation in Chipotle's stock price in 2022 is not likely based on my assessment of the company's 2022 financial outlook and its current valuations. On the flip side, CMG has a long growth runway as evidenced by its long-term unit growth potential. Taking into account both near-term headwinds and long-term growth opportunities for the company, a Hold rating for CMG is fair.
CMG Stock Key Metrics
CMG's financial performance was decent in the fourth quarter of 2021. The company's Q4 2021 revenue met market expectations, while its recent quarterly non-GAAP adjusted earnings per share were better than what Wall Street expected.
Chipotle's revenue increased by +22% YoY to $1,961 million in the recent quarter as disclosed in its Q4 2021 financial results media release, and this was marginally above the sell-side's consensus top line estimate of $1.96 billion. Separately, CMG's adjusted earnings per share surged by +60% YoY from $3.48 in Q4 2020 to $5.58 in Q4 2021, which was +5% higher than the market consensus' forecasted fourth-quarter bottom line of $3.48 per share.
The company also did well on a number of other metrics in the recent quarter. The +15.2% growth in comparable restaurant sales in Q4 2021 was above Wall Street's consensus expectations of a +14.9% increase as per S&P Capital IQ data. Chipotle also beat expectations in terms of new restaurant openings, as it added 215 new restaurants in 2021 which was better than its earlier guidance of 200 new restaurant openings last year. In addition, CMG disclosed at the company's Q4 2021 results call that the number of its loyalty program members grew from 24.5 million in Q3 2021 to 26.5 million in Q4 2021.
Despite delivering a reasonably good set of results in Q4 2021, Chipotle's current share price is still way below its historical highs.
What Is The Highest Chipotle Stock Has Ever Been?
Chipotle reached its all-time share price peak of $1,958.55 on September 23, 2021 during intra-day trading, and its last traded stock price of $1,442.28 as of March 4, 2022 represents a -26% correction from its all-time high.
CMG's Share Price Performance Following Fourth-Quarter Results Announcement
Seeking Alpha
Although Chipotle's shares rose by +10% on the day after it released Q4 2021 earnings, the company's stock price outperformance relative to the S&P 500 has narrowed in recent weeks as per the chart above.
In the next section, I focus on the stock price outlook for CMG in 2022 and determine if it is possible for Chipotle's shares to revisit its historical high.
Can Chipotle Stock Rise Further In 2022?
Chipotle's shares did pretty well in 2021, rising by +32.5% last year which was slightly better than the S&P 500's +30.6% increase over the same period. Year-to-date in 2022, CMG's stock price fell by -17.5%, which is worse than the 8.9% decline for the S&P 500 this year thus far.
In my opinion, it will be challenging for Chipotle to sustain the positive stock price momentum from 2021 and reverse its year-to-date share price decline in 2022.
CMG is expected to see a substantial slowdown in the company's top line and bottom line growth for fiscal 2022. According to financial forecasts sourced from S&P Capital IQ, Chipotle's revenue growth is expected to come down from +26.1% in FY 2021 to +14.9% in FY 2022. The company's adjusted earnings per share growth is expected to normalize from +136.9% last year to +23.8% this year. These consensus estimates are supported by Chipotle's January 2022 disclosures and Q1 2022 guidance.
At the company's most recent Q4 2021 earnings briefing, Chipotle revealed that its comparable restaurant sales growth was only +5% in January 2022 which it attributed to both the pandemic and unfavorable weather conditions. More importantly, CMG guided for Q1 2022 comparable restaurant sales growth to be in "the mid to high single-digit range" and this is much lower than the company's +19.3% and +15.2% increase in comparable restaurant sales for FY 2021 and Q4 2021, respectively.
With respect to profitability, Chipotle is expecting "underlying Q1 (restaurant-level operating) margin would be in the low to mid-23% range" if adjusted for "elevated marketing spend" and "transitory COVID-related cost pressures." CMG's headline Q1 restaurant-level operating margin without these adjustments is expected to be around 22%, which is inferior to the company's 22.6% FY 2021 restaurant-level operating margin. This is not a big surprise, as inflationary pressures relating to food and labor are expected to still be a drag on Chipotle's profitability this year.
Looking ahead, Chipotle could potentially raise prices again (prior price hike was +4% in December 2021) for the rest of 2022 to offset cost pressures, but it is uncertain how much impact this will have on demand. CMG stressed at its Q4 2021 investor briefing that "we still have pricing power to use as needed if inflation continues to rise" but it also emphasized that it will "be thoughtful and patient as we consider these actions."
Apart from the more modest financial outlook this year, Chipotle's shares are quite fairly valued which limits the capital appreciation potential for the stock in 2022. The market currently values CMG at a consensus forward next twelve months' P/E multiple of 45.8 times as per S&P Capital IQ, which is slightly lower than its 10-year mean forward P/E multiple of 48.0 times. Chipotle's current P/E valuations are also largely aligned with its FY 2022-2024 revenue CAGR of +14.4% and its FY 2022-2024 ROEs in the high 30s to low 40s percentage range based on consensus sell-side forecasts.
In summary, I think a significant rise in Chipotle's share price in 2022 is less likely.
Is CMG Stock A Good Long-Term Buy?
Notwithstanding short-term challenges outlined in the previous section, CMG stock is a good long-term investment candidate when valuations are more attractive and the near-term outlook turns favorable.
There are two key indicators that support expectations of a long growth runway for Chipotle.
The first indicator is the ceiling for the company's store footprint in North America.
CMG boasts a network of 2,966 outlets as of the end of 2021, and this is about 43% of the 7,000 number of Chipotle restaurants that it thinks that the North American market can support, as indicated in its Q4 2021 results press release. More significantly, this new long-term guidance is +17% higher than its prior expectations of having 6,000 restaurants in North America. Chipotle explained at its fourth-quarter earnings call that its confidence in a larger store footprint stems from "the success of small town opportunities that are delivering unit economics at or better than our traditional locations."
The second indicator is annual unit growth.
Chipotle mentioned in the company's fourth-quarter earnings press release that it can achieve unit growth of +8%-10% for every year in the medium term. This is much better than the company's 2022 new restaurant openings guidance of between 230 and 250, which points to unit growth in the +7.9%-8.4% range.
In my August 2021 update for CMG, I mentioned about "Chipotlane" or what the company describes as its "drive-thru digital order pick-up lane" which "was first launched in 2018." As Chipotlanes support "higher-margin digital sales", CMG is able to open new restaurants that come with Chipotlanes in small towns where physical sales alone weren't sufficient to support new store openings in such locations. Notably, CMG expects that at least 80% of new restaurants opened in the future will have Chipotlanes. In other words, the success of Chipotlanes have allowed CMG to expand its total addressable market.
In a nutshell, Chipotle's long-term growth prospects are excellent from the perspective of the long-term unit growth opportunity.
Is CMG Stock A Buy, Sell, Or Hold?
CMG stock is a Hold. Chipotle is an attractive long-term investment candidate as I detailed in the previous section. But CMG is not a Buy now, as its current valuations are unappealing and it is expected to witness much slower growth in 2022.
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Source: https://seekingalpha.com/article/4493425-chipotle-stock-continue-rise-2022
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