(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Chipotle Mexican Grill Inc. (CMG) shares have dropped 18% off their August highs but are now poised to rebound by 12% based on technical analysis. Should that happen, the shares will be up by 65% on the year. Analysts see the stock rising by an average of 8%, driven by strong earnings growth this year and next.
The chart suggests a change of direction may be on the way after two months of steep declines. The stock has fallen to a critical zone of technical support at $425 to $435. Should the shares successfully rise above $435 then the next level of technical resistance does not come until $476.
Another positive indicator is that the relative strength index (RSI) has been trending higher since July of 2017. The long-term bullish trend in the RSI suggests that bullish momentum has been moving in the stock over that period. Additionally, the RSI started to trend higher when the stock was trading near its lows, and that is a bullish divergence. (For more, see also: Chipotle Stock Could Gain More Than 20%: MS.)
Analysts See Gains
Overall analysts see the stock rising to an average price target of $465. But of the 33 analysts covering the stock only 30% rate it a buy or outperform, while 55% rate it a hold.
Despite the mixed views, analysts are looking for the company to report strong third-quarter results on October 25, with earnings forecast to rise by 52% to $2.03 per share. Meanwhile, revenue is estimated to increase by 10% to $1.2 billion. (For more, see also: Understanding Chipotle's Financials.)
The full-year results are expected to be strong, with earnings forecast to rise by 30% and 41% next year. But for the faster earnings growth to happen, it will have to come on lower cost. This is because analysts currently forecast revenue to grow by 8% both this year and next.
The shares do trade at a 2019 PE ratio of 36, which is nearly double the S&P 500. But considering the forecasted growth rates, the PEG ratio is less than 1 at 0.9. If those earnings estimates for next year hold up or improve, then the stock may still have even further to climb.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.