Casual fast food chain Chipotle Mexican Grill, Inc. (NYSE:CMG) is likely to report a "lackluster" third-quarter earnings release Oct. 25, but RBC Capital Markets is looking beyond the reported quarter to make a bullish case for the stock.

The Analyst

Analyst David Palmer upgraded Chipotle from Sector Perform to Outperform with a price target lifted from $450 to $510.

The Thesis

Chipotle's report could "disappoint" investors with a same-store sales miss, although investors should look beyond one quarter and instead at the stock's favorable near-term outlook, Palmer said in the Monday upgrade note.

Since Brian Niccol was appointed CEO in early 2018, Chipotle has focused on an "innovation-first culture," including a move of its head office to California to better attract highly talented technology workers, the analyst said. 

Chipotle failed to "give consumers a reason" to visit its stores since a 2015 food safety outbreak, Palmer said. RBC's proprietary survey found that 16 percent of respondents haven't eaten at Chipotle in the past six months due to food safety concerns. Also, 21 percent of respondents said improved food safety and quality would encourage them to eat at Chipotle more often.

Given Niccol's success at Taco Bell, he should be able to "find wins" and translate improved food safety and new menu innovation into higher sales, the analyst said. 

Price Action

Chipotle shares were trading higher by more than 1 percent at $432.93 at the time of publication Monday. 

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Photo courtesy of Chipotle.