Making Sense Of A $500 Price Target On Chipotle Shares

Chipotle Mexican Grill, Inc. (NYSE: CMG)'s recently appointed CEO Brian Niccol and a handful of other executives will earn performance bonuses if the company achieves certain metrics. Assuming these objectives are realistic, a case can be made for notable upside in Chipotle's stock, according to Bernstein. 

The Analyst

Bernstein's Sara Senatore maintains an Outperform rating on Chipotle's stock with an unchanged $500 price target.

The Thesis

Niccol and other senior executives are entitled to earn performance share grants based on specific levels of comparable restaurant sales increases through 2020 and restaurant-level cash flow margins in 2019 and 2020, Senatore said in a Tuesday report.

The executives would need to oversee average same-store sales growth of 4-6 percent and restaurant-level margins of 18.5-22 percent, Senatore said. 

In order for management to achieve its restaurant-level margin objective, Chipotle must enact cost-saving initiatives "across the board," the analyst said. Chipotle does face "significant opportunities" to manage its expenses, and the company announced multiple waste management initiatives that imply that costs have not only been historically undermanaged, but "underscore the magnitude" of opportunities ahead, she said. 

Chipotle's approach to marketing and pricing has historically been "suboptimal," as its first-ever national TV ad offered "ineffective messaging," Senatore said. But a new campaign is underway and "rightly" focuses on food imagery and ingredient quality, she said. 

Bernstein is modeling for 5.5-percent comp growth in 2020 at Chipotle, with a restaurant-level margin of 21.5 percent and EPS of $17.95. Applying an appropriate multiple of 28x on the estimated EPS derives a price target of approximately $500 by the end of 2019. 

Price Action

Chipotle shares were up 0.72 percent at the close Tuesday at $333.10. 

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Photo courtesy of Chipotle.