Today’s buy idea is a fast-casual restaurant chain with super strong momentum. We also have a sell alert from Dow Theory Forecasts.
Chipotle Mexican Grill (CMG)
from Argus Weekly Staff Report
We are maintaining our BUY rating on Focus List selection Chipotle Mexican Grill Inc. (NYSE: CMG) and raising our target price by $110 to $580, reflecting the company’s more favorable earnings prospects.
Chipotle is boosting comp-store sales and market share through workforce development, new menu items, and improved throughput. In 2013, it began its ‘Food with Integrity’ program, which emphasizes the use of naturally raised pork, chicken, and beef, as well as organic produce. The program is in keeping with the company’s traditional emphasis on natural products, and we expect it to remain popular with customers.
Chipotle is one of the few restaurant chains that is growing rapidly. It increased its store count approximately 15% in 2012, and plans to open 165-180 units in 2013. Thirty of these new restaurants will be in underpenetrated markets where operating and development costs are relatively low.
The company is also expanding internationally, particularly in Europe. It currently operates one restaurant in Paris and six in London, and plans to open an additional location in each city. It is also expanding in Canada, where it currently has five restaurants.
In the U.S., Chipotle is developing its group of ShopHouse Southeast Asian Kitchens. ShopHouse offers Southeast Asian cuisine made with naturally raised food, and allows diners to customize their meals, which are cooked in plain view. Chipotle currently operates one ShopHouse restaurant in Washington, D.C. and plans to open additional locations in Washington, Maryland and California over the next two years.
In another initiative, CMG began offering catering services in the first quarter of 2013, and rolled out these services throughout the U.S. in August 2013. We expect this business to benefit sales and earnings in the near term.
During the first quarter of 2013, CMG began a new outdoor print and radio advertising program, ‘Skillfully Made,’ which emphasizes the company’s cooking methods. Chipotle plans to roll out this campaign in 26 markets throughout the U.S. by the end of 2013. Management is also using local marketing to boost customer loyalty and attract new customers.
Our long-term rating remains BUY, as Chipotle has emerged as a leading casual dining chain. The company has a solid base of loyal customers and may eventually open as many as 3,000 restaurants. We view Chipotle as suitable for investors seeking long-term capital appreciation.
John Staszak, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, October 25, 2013