Quick service restaurant chain Chipotle Mexican Grill (CMG, Financial) reported its fiscal 2015 first quarter numbers on April 21. While the company posted better than anticipated earnings per share, it failed to meet the analyst expectations related to the top-line and this pushed the stock price down slightly. So, should investors stay away from this restaurant stock? Definitely not. Instead, this is a great time to start or expand position in the stock. Here’s a quick look at what all went on during the quarter and what makes it good to buy the stock at the moment.
Key takeaways of the quarter
The quick service restaurant may have failed to make the street happy, but it still posted year on year revenue growth of 20.4% to $1.09 billion, as against market’s expectations of $1.11 billion. Even the bottom-line growth figure was impressive at 47.6%, resulting in earnings of $122.6 million. In the sequentially previous quarter (Q4 FY14), Chipotle had posted revenue growth of 26.7% and earnings growth of 52%. For the current quarter comp sales surged 10.4%, and restaurant-level operating margin improved sequentially by 160 bps to 27.5%.
According to Chipotle co-CEO, Steve Ells, “We are very proud of our start to 2015, as our average sales volumes reached a record $2.5 million per restaurant… we remain confident that higher quality, Responsibly Raised® ingredients taste better and will continue to resonate with our customers.” The current quarter was definitely not the easiest in the company’s history and it had its own challenges. The company was facing problems with its pork supply and because of that more than 1,800 stores were running short of carnitas. However, on the back of its unique food and people culture, Chipotle was able to pull off another quarter of good top-line and bottom-line improvements.
During the quarter Chipotle increased average transactions by 21 across the entire day, something that management believes to be “a tremendous accomplishment”. Chipotle also focused on expansion and opened 49 stores during the period, bringing the total store count to 1,831 restaurants. Looking forward, management expects to open another 142 to 156 restaurants in 2015.
No need to worry about slowing growth
Some are worried about the slowdown of the pace of growth. It’s true that last year Chipotle’s performance was even better. But one needs to understand that the company is going through a tough time with shortage in supply of pork. The shortage is expected to continue for the coming few months and should be resolved by the end of the year. That being absent, Chipotle’s numbers would have been even better.
According to a Fortune report, “The pork shortage, along with the bad weather that afflicted the eastern half of the U.S. this winter, lowered Chipotle’s comparable sales growth by about 2 percentage points to 10.4% in the first quarter, below the 11.8% analysts were projecting.” The problem with pork supply is definitely not beyond repair and it’s only a matter of time before Chipotle jumps back into the game and starts serving the very popular carnitas.
What makes Chipotle a great buy right now?
All this confusion and negative sentiments related to the slowdown in the growth momentum presents the perfect investing opportunity. The following graph clearly shows the massive drop in the stock price after it reported earning on Tuesday, April 21 – as of this writing the stock is trading at $637.5, down from Tuesday’ high of $698.35, translating into a 8.7% plunge in four days. This dip in stock price shouldn’t be seen as a negative. Rather it’s the perfect opportunity.
Source: Yahoo Finance
Investors who have been following the stock for some time have seen it rise from somewhere around $150 in 2010 to $714 in 2015, increasing more than 4.5 times. The stock still has huge upside potential and its performance should improve drastically once the supply issue is resolved. So, long-term investors should definitely grab the stock right now when it is trading at a lower price and benefit from any future price increase.
According to Yahoo Finance, the high target for the stock is $825 – 29.4% higher than the current market price, and all 30 analysts are optimistic about the potential of the stock. Chipotle has built its success on the promise of providing fresh ingredients and being a healthier alternative to available fast food. Initiating or expanding position in the stock makes perfect sense and all long-term investors should consider Chipotle for their portfolio.
