Can Chipotle (CMG) Keep the Earnings Streak Alive? - Analyst Blog

We expect Colorado-based fast casual chain, Chipotle Mexican Grill, Inc. CMG to beat expectations when it reports first-quarter 2014 results on Apr 17, before the opening bell.

Why a Likely Positive Surprise?

Our proven model shows that Chipotle is likely to beat earnings because it has the right combination of two key components.

Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +1.06%. This is very meaningful and a leading indicator of a likely positive earnings surprise for the company.

Zacks Rank: Chipotle has a Zacks Rank #2 (Buy). Note that stocks with Zacks Ranks #1 (Strong Buy), 2 (Buy) and 3 (Hold) have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.  

The combination of Chipotle's Zacks Rank #2 and ESP of +1.06% makes us confident of an earnings beat on Apr 17.

What is Driving the Better-Than-Expected Earnings?

Chipotle has been a consistent growth story in the fast casual restaurant sector with its stock climbing 58% over the past one year. Additionally, Chipotle has delivered positive earnings surprises in two out of four trailing quarters. Moreover, the company has an average earnings beat of 2.1%.

In fact, Chipotle's fourth-quarter earnings grew 30% year over year driven by a 21% increase in the top line along with increase in comps. Given the trend over the past three quarters, comps are expected to improve in the upcoming quarter as well, driven by improving traffic.

Menu innovation has been the key to Chipotle's improvement in traffic. The company's latest move toward more organic, sustainably grown or raised, non-GMO (genetically modified organisms), lower carbohydrate ingredients, shows that it is constantly evolving.
    
Further, with its Asian concept restaurant — ShopHouse Southeast Asian Kitchen — and investment in the fast casual pizza business — Pizzeria Locale — the company is seeking to bring in menu innovation. Additionally, the company's catering program remains another growth avenue that will help boost the top line.

Even though the recent surge in food costs might prove to be a dampener, in our view, Chipotle will be able to sustain bottom-line growth, with increasing sales and healthy comps growth.

Other Stocks to Consider

Chipotle is not the only firm looking up this earnings season. We also anticipate earnings beat from three other companies in this industry:

Arcos Dorados Holdings Inc. Cla ARCO has an Earnings ESP of +25.00% and a Zacks Rank #2.

The Cheesecake Factory Incorporated CAKE has an Earnings ESP of +4.08% and a Zacks Rank #3 (Hold).

Ruby Tuesday, Inc. RT has an Earnings ESP of +11.11% and a Zacks Rank #3.