About That Big Price Target for Chipotle Mexican Grill

Let’s be honest. We all innately know that stocks are valued not for where the company is, but for where it appears to be going. And since nobody has a crystal ball, it’s tacitly accepted that a stock’s price usually reflects the average risk — the unknown future — investors see in buying into a particular company.

Let’s continue being honest, though. Piper Jaffray’s recent reiteration of its bullish stance on Chipotle Mexican Grill, Inc. (NYSE:CMG) and recently upped price target on CMG stock is far more about assuming the market’s going to buy into the “suddenly hot” story — and far less about the company’s plausible future success.

High Hopes

On the off chance you’re reading this and aren’t aware, the past couple of years have been miserable ones for Chipotle Mexican Grill, as well as for owners of CMG stock. The company was pegged as the epicenter of an E. coli outbreak back in late 2015. And rather than apologize and move on, the company decided it would be better served by deflecting and pointing the finger at anyone besides itself.

Big mistake.

Consumers, ready to forgive and forget, were reminded of the gaffe, with the company’s whining only ingraining the memory in customers’ minds. Even as of the final quarter of last year, sales were lackluster.

A ray of hope finally started to shine late last month though. That’s when the company reported solid year-over-year progress for the first time in a long time. Revenue grew 7.4%, and was up 2.2% on a same-store basis. Earnings of $2.13 per share of CMG stock were well up from the the previous year’s $1.60.

The end result? Chipotle stock popped about 24% that very day, to a close of $422.50, and has held its ground ever since.

Fast forward to Monday morning. That’s when Piper Jaffray analyst Nicole Regan, having had some time to chew on it, reiterated the firm’s “Overweight” stance on the company and raised its target price on CMG stock from $420 to $530.

A price of $530 is 24% better than the stock’s current value.

Never say never. On the other hand, sooner or later, all stocks have to justify their valuation, and Chipotle may struggle to justify a price anywhere near $530 anytime soon.

Some Needed Perspective

Credit has to be given where it’s due. Chipotle has turned things around, with a new CEO has also setting a new tone. Given enough time, Chipotle stock could, in fact, reach that $530 level.

It could take a long, long time to get there, though.

Just for a little perspective, analysts collectively expect Chipotle Mexican Grill to earn $8.58 per share this year (which just got started). That’s not even a completely fair yardstick to use, though, as the company is still digging its way out of the bills that piled up from the E. coli impact.

For the sake of fairness, let’s give new CEO Brian Niccol some time to get acclimated, and let’s give Chipotle another year to continue its repair work. For 2019, analysts expect a bottom line of $11.54 per share of CMG stock. In fact, let’s give the company two full years to get things ship-shape again. Its 2020 earnings outlook, according to analysts, is $14.03 per share.

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At that point, assuming Chipotle can, in fact, report that kind of income, a price of $530 would still translate into a price-to-earnings ratio of 37.8. Even at Bernstein’s high-end 2020 per-share profit outlook of $18.00, Chipotle shares would be trading at 29 times earnings.

That’s an awfully rich price to ask any investor to pay for a restaurant stock that will be firing on all cylinders within that couple of years.

Bottom Line on CMG Stock

Again, never say never. Niccol was the former chief of Yum! Brands, Inc. (NYSE:YUM) division Taco Bell, and Taco Bell was recently named the nation’s favorite Mexican restaurant — dethroning (amusingly enough) Chipotle Mexican Grill. Maybe Niccol’s got some more tricks up his sleeve, so to speak. Maybe Chipotle will be able to exceed all expectations.

Investors can’t blindly bite into a “maybe” forever, though, without some serious fundamental evidence that there’s at least a shot at justifying the risk of a huge target.

In other words, maybe that $530 price target is more of a hope-driven response to the market’s recent euphoria than it is a fundamentally-supported thesis.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter