How Chipotle Can Hit $825 On Carnitas Return, Coupons And BOGO

• Shares of Chipotle Mexican Grill, Inc. CMG have increased 12.55 percent over the last three months, from a low of $655.46 on July 14.
• RBC Capital Markets’ David Palmer has maintained an Outperform rating on the company, while raising the price target from $740 to $825.
• Although there was limited margin expansion in 3Q, Palmer expects the company to see accelerated sales momentum through 2H15.

Analyst David Palmer explained that “Chipotle is one of the 25 stocks in the S&P500 that is expected to have double-digit revenue and earnings growth over the next three years,” while mentioning, “We believe the company’s high sustainability of earnings and strong ongoing new store productivity and 70 percent ROIC are deserving of a premium retail PE-Growth ratio.”

According to the RBC Capital report, sales trends are expected to accelerate through 2H15 due to the increased coupon mailing by Chipotle Mexican Grill, which started towards the end of 2Q. Also, sales are expected to be driven by the “Friend of Faux” BOGO/web game reward, as well as the easing of the pork shortage.

“However, ineffective labor scheduling and increases to wages/ employee benefits, which is said to cost $2.5M per quarter, are likely to cause labor deleverage during 2H15,” the report stated.

Palmer believes that the low mix of offsite ordering would offer the company “an important sales opportunity,” while the hiring of Curt Garner as Chipotle Mexican Grill’s new CIO implies that the company intends to enhance its digital presence.

The EPS estimates for 2015 and 2016 have been raised.