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Chipotle Kept Neutral on Mixed Q3

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On Dec 26, we reiterated our long-term Neutral recommendation on casual dining restaurateur Chipotle Mexican Grill, Inc. (CMG - Free Report) following mixed third-quarter results announced on Oct 17.

Why the Neutral Recommendation?

Chipotle’s third-quarter 2013 earnings of $2.66 per share missed the Zacks Consensus Estimate of $2.77 by nearly 4% due to increased costs and lower margin. However, earnings were up 17.2% year over year, led by higher top line.

Revenues grew 18.0% year over year to $826.9 million and also beat the Zacks Consensus Estimate of $818 million by 1.1%. The better-than-expected sales were backed by higher comparable sales (comps) growth and unit expansion.

Following the improving traffic trend, the company has raised its comps guidance for 2013. Management now expects comps to grow in mid single-digits, higher from the previous estimate of low-to-mid single digits.

We expect the company’s initiative to provide GMO (genetically modified organism)-free foods will trigger its business in the ensuing quarters. Overall, we are encouraged by Chipotle’s strong market standing, new menu launches and increased media exposure. We believe that the company has compelling growth drivers like the ShopHouse concept and catering program to sustain the revenue momentum.

However, Chipotle is highly susceptible to commodity inflation. The company believes that the cost of food will be higher in the first half of 2014 due to the rise in avocado and steak costs, thus, hurting margin. The company’s several sales building initiatives including marketing programs and improved supply chain will lead to higher costs.

The restaurant industry has been experiencing sluggish growth and slowdown in consumption over the last few quarters. Slow job growth, high interest rates and still-tightened credit availability continue to hurt consumer discretionary spending.

Other Stocks to Consider

Chipotle carries a Zacks Rank #3 (Hold). Other better-ranked restaurateurs are Brinker International, Inc. (EAT - Free Report) , Buffalo Wild Wings Inc. and The Cheesecake Factory Incorporated (CAKE - Free Report) . All these companies carry a Zacks Rank #2 (Buy).

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