One fast-casual restaurant chain has remained a favorite on Wall Street even as the U.S. grapples with a potential looming recession. Analysts see Chipotle Mexican Grill shares surging nearly 20% in the coming year. Over the past 15 months, the burrito chain has introduced three rounds of price increases that boosted the cost of its products 13% from a year earlier. The increases were due to higher costs for dairy, packaging, tortillas, avocados and wage increases in some areas. While the decision boosted sales and protected profit margins, it also turned off some investors who were wary of the price hikes, fearing it would drive customers away. Shares fell 20% in 2022. CMG 1Y mountain Chipotle chart showing 1-year performance This year, however, Wall Street sees the price hikes abating and Chipotle stabilizing itself for success in the next leg of the economic cycle. The consensus analyst rating is overweight with an average price target of $1,778, per FactSet. That implies upside of 18% from Thursday’s close. “Attracting high-income consumers, leveraging a strong debt-free balance sheet to fuel growth, and with a track-record of growth stickiness during past recessions, CMG should compound even in softer macro conditions,” Bernstein analyst Danilo Gargiulo wrote in a Dec. 8 note naming Chipotle a top pick. He has an outperform rating and a $1,900 price target on shares. Price increases padding margins Because Chipotle hiked prices so much in the past year and a half, they likely won’t have to do any more increases in the near term, said Nick Setyan of Wedbush Securities. “I think a lot of other restaurants, particularly in the fast-casual category, are going to take price increases in order to offset what may be mid- to single-digit inflation across food costs and labor in 2023,” he said, adding that Chipotle won’t have to do this. “Whatever value gap that they gave up over the past year or so, they’re going to be able to recover,” he said. He expects that transactions, which turned negative in the third quarter of 2022 and are likely to be in the red in the fourth quarter as well, will turn positive as soon as the first quarter of 2023. Other analysts agree. David Palmer, who also rates Chipotle a buy, said it’s a top pick in 2023 and has a $2,000 price target — one of the highest on the Street. Palmer expects foot traffic to improve by the second quarter of this year. He also sees Chipotle’s delivery pricing, which weighed on the company, continuing to improve. Chipotle has some pricing protection because it sources some ingredients through small farmers and multiyear contracts, avoiding some of the major food suppliers and limiting exposure to commodity price fluctuations. That gives analysts some visibility into what margin expansion can be expected in 2023, which differs from competitors, said Setyan. “I also think that their particular basket of goods may result in lower inflation than peers,” said Setyan. The perception of value will be key if consumers feel the need to tighten their belts further. And they might. Bank executives on Friday said they are increasingly expecting a mild recession this year. Both JPMorgan’s Jamie Dimon and Bank of America’s Brian Moynihan are in this camp . Since they have insight into both consumer savings and credit card habits as well as corporate spending, they are in a good position to see trends coming. CMG YTD mountain Chipotle YTD The fast-casual sweet spot Chipotle also has history on its side – it fared well in the Great Recession in 2008, said Sharon Zackfia of William Blair. She has a buy rating on the shares, which are up nearly 9% in 2023. “The resiliency has been strong historically,” she said. She added that Mexican is a high-frequency cuisine for many consumers, and that Chipotle has the benefit of fresh ingredients, which signify health. Part of the reason for this, and why analysts see it weathering any upcoming slowdown, is its position in the fast-casual dining space. “The fact that a lot of the layoffs are concentrated in the mid to higher income is insulating,” said Setyan. He added that job prospects are also still strong for lower-income consumers, which bodes well for Chipotle. “They represent good value,” said Palmer. “Their price gap to the competition has remained the same – you know, if you go order a burrito, it’s still $12 everywhere in the country except for New York City.” In addition, many Wall Street analysts are forecasting a mild recession, which is better for fast-casual restaurants as the hope is consumers won’t have to pull back very much or for very long. Potential for growth Another reason that Wall Street likes Chipotle is that it has solid potential for growth in the coming months and years, according to Zackfia. The company has more than 3,000 U.S. locations and plans to continue to add features such as digital ordering at drive-thrus, which boosts value. “That’s pretty exciting when you have a company that’s got over 3,000 locations but it still feels very much like a white space story,” said Zackfia. In its October earnings release, Chipotle predicted it would open between 235 and 250 new restaurants in 2022, and ramp up the pace to between 255 and 285 openings in 2023. She added that Chipotle’s rewards program is another lever that they didn’t have in the last recession that adds a buffer to transactions even amid a potential economic slowdown. A solid industry Of course, just because Chipotle did well in the last recession doesn’t guarantee that they’ll outperform this time around if the U.S. economy does weaken. One of the biggest things that would dash analyst expectations is if Chipotle continues to raise prices, which would potentially pad sales but could turn off consumers. Overall, however, Wall Street sees fast-casual restaurants holding up to economic weakness. Beyond Chipotle, competitor Yum! Brands , which operates Taco Bell, Pizza Hut and KFC, is also highly rated by analysts. It has a median rating of overweight and more than 7.25% upside from Thursday’s close.
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