Cowen Upgrades Chipotle, Names It A 'Best Idea' For 2020

Casual fast-food chain Chipotle Mexican Grill, Inc. (NYSE: CMG) has seen its stock nearly double over the past year but there is still room for more upside in 2020, according to Cowen.

The Analyst

Cowen analyst Andrew Charles upgraded Chipotle's stock from Market Perform to Outperform with a price target lifted from $800 to $970.

The Thesis

Chipotle is considered one of the firm's "Best Ideas" for 2020 as the company's "outstanding run" under CEO Brian Niccol can continue through at least 2024, Charles wrote in the note. By 2021, average unit volume (AUV) could match prior historical peaks of $2.5 million and rise to $3 million by 2024.

Charles said the sales momentum will come in part from growing digital pick-up and third-party sales. The mix of digital sales could nearly double from 18% of all sales today to 34% in five years. The higher sales mix will also come with better restaurant margins from higher ticket sizes.

Chipotle is also well positioned to address growing consumer demand for transparent food sourcing, according to Charles. Consumers want to better understand "what's in my food" and the company's "scratch cooking techniques in an open kitchen" is exactly what consumers want to see.

The importance of food transparency, based on Cowen's proprietary survey of 2,500 consumers, rose from 55% in January 2016 to 64% in September 2019.

Under Niccol's leadership, Charles said, Chipotle's brand is "more visible" due to a marketing budget of 3% of sales. If the 3% of total sales threshold is kept, it would imply a 12% to 14% lift in marketing spend. Coupled with existing marketing initiatives like a loyalty program, the Chipotle brand will "be more top of mind for consumers."

Price Action

Chipotle's stock traded higher by 3% to $810.31 at time of publication.

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Photo credit: Chis Potter, Flickr