Ahead Of Chipotle's Q2 Earnings Results, Baird Says Wait For Better Entry Point

Analysts at Baird continue to be "highly optimistic" toward Chipotle Mexican Grill, Inc. CMG's outlook but aren't ready to recommend buying the stock yet.

Baird's David Tarantino maintains a Neutral rating on Chipotle's stock with an unchanged $490 price target ahead of the company's second-quarter earnings report scheduled for July 25. While the analyst is positive on management's focus on improving the brand at the unit-level and improving sales and profitability, the stock's valuation needs to be taken into account.

Chipotle's stock is now trading at 35.5x 2018E EPS, which implies investors are "discounting a more meaningful near-term sales recovery than current estimates are assuming," the analyst noted. As such, Chipotle's stock could move lower if the trajectory of the sales recovery "continues to be shallow" in the near term.

Chipotle's stock will look attractive at a multiple that is closer to 30x 2018E, the analyst added. This translates to a per share price in the mid- to high-$300s.

Q2 Expectations

Chipotle is expected to earn $2.01 (versus consensus estimate of $2.24) in its second quarter on comps of 9.0 percent (versus consensus estimate of +9.5 percent) and EBIT margin of 8.0 percent, the analyst continued. Related Links: Where Do Restaurant Stocks Stand In A World Dominated By Amazon? Piper Jaffray On Chipotle: Remain Patient In Owning Shares

At the very least, the company is expected to meet this forecast, especially when considering the fact that sales should have benefited from incremental pricing and sales-driving initiatives.

Bottom line, investors should wait for either a better entry point in the stock or sufficient reasoning to conclude it can generate upside to comps projections.