Chipotle’s Shares Fairly Valued
The restaurant’s ability to raise prices to offset higher costs supports our thesis that the narrow-moat company benefits from strong brand intangible assets, writes Morningstar analyst R.J. Hottovy.
The key question coming out of
Although the sales trends--which still outpace much of the restaurant industry--did drive less margin expansion than we've become accustomed to, Chipotle still increased restaurant margins by 70 basis points to 28% and operating margins by 190 basis points to 19%. Admittedly, the implementation of a new workforce enterprise system and hourly wage rate increases (a prudent move, in our view, to retain talent ahead of competitors' similar moves) weighed on the labor expense line, but was more than offset by better-than-expected food costs (largely dairy and avocado). We remain comfortable with our full-year outlook for restaurant margins of 28.0% and operating margins of 18.6%.
There is no change to our $650 fair value estimate, and we view the shares as fairly valued. We would keep this name on the radar screen for any undue pullbacks in the back half of the year.
Morningstar Premium Members gain exclusive access to our full Analyst Reports, including fair value estimates, consider buying/selling prices, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.