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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.

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About the Author

RJ Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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