Chipotle Mexican Grill Inc CMG

Chipotle Earnings: Transaction-Led Share Gains Lay Market Concerns to Rest; Shares Still Pricey

Wide-moat Chipotle reported strong second-quarter earnings, posting 11% comparable store sales growth on the back of 8.7% growth in comparable transactions as operational improvements and a triumphant return of the chicken al pastor limited-time offer resonated with consumers. While Chipotle kept its full-year comparable store sales and store development guidance, resulting in very little expected change to our $11.4 billion sales and $1.04 diluted earnings per share estimates for the year, we're increasingly encouraged by the ramifications of transaction-led comparable sales growth for the firm's long-term store-level profitability prospects. So, we expect to lift our long-term restaurant margins by about 200 basis points to 31.2% by 2033 as a result of stronger expected leverage (incremental transactions flow through at about a 40% margin rate), driving an expected mid-single-digit percentage increase to our $40 per share fair value estimate. However, shares continue to look meaningfully overvalued after a 4%-5% increase in volatile after-market July 24 trading.