A Chipotle Mexican Grill location in California.
David Paul Morris/BloombergChipotle Mexican Grill stock was climbing on Tuesday, after Truist issued a bullish update which highlighted the burrito chain’s latest menu price increases.
Analyst Jake Bartlett reiterated a Buy rating on Chipotle (ticker: CMG), while raising his price target to $1,750 per share from $1,700. The move comes after Bartlett analyzed prices on Chipotle’s website, where the cost of both steak and barbacoa recently went up approximately 4%. Those changes, implemented last week, follow Chipotle raising the price of its entire menu by about 2.5% in late 2020.
Bartlett explained his reasoning for the updated price target. If steak and barbacoa account for around 25% to 30% of the average Chipotle order, he argued, their new prices would translate to a roughly 100 basis point increase in price—or 1%—for the menu as a whole “before any impact on sales mix (i.e. shifts back to chicken).”
Chipotle’s new steak and barbacoa prices likely stem in part from higher beef costs, which were running about 4% higher year over year last week. Yet Bartlett wrote that “the driving force is the increased mix of steak/barbacoa during the Covid pandemic, which negatively impacts margins (though not necessarily dollar profit).” Framed in that way, the price hikes are a key step in Chipotle’s journey toward hitting its goal of higher margins.
That said, these changes won’t fully pad Chipotle locations’ bottom lines. Bartlett expects that only about half of the 1% menu-wide price increase will flow through to profits, given higher beef costs and consumers’ switching back to cheaper options like chicken.
Still, that’s enough for him to lift his 2021 and 2022 Chipotle earnings per share estimates to $27.55 and $35.10, respectively, from $26.97 and $34.25. Meanwhile, the 2021 consensus estimate expects $23.08 in earnings per share, while the 2022 one calls for $30.51.
Chipotle was up 2.6% Tuesday afternoon, trading at $1,489.89 per share. The stock has gained 7.4% year to date—and soared 111.5% in the past 12 months.
Other analysts have also pointed out that only modest price increases would go a long way for Chipotle’s delivery profits.
Write to Teresa Rivas at teresa.rivas@barrons.com
April 07, 2021 at 02:26AM
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Chipotle Has a New Price Target. Blame the Beef. - Barron's
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Beef
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