Chipotle (CMG) Earnings: Its Adaptability Makes it a Long-Term Buy

Chipotle sign on a storefront
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When it comes to people, I believe that relentless positivity can be overdone. Not everything life throws at us is a challenge and an opportunity to grow. Some things are unfortunate, unfair, or just plain suck, and no amount of positive thinking can change that. Those who smile at your misfortune and insist it could actually be a good thing often come across as annoying and insensitive rather than helpful. When it comes to corporations, on the other hand, treating setbacks as challenges and responding to them by changing and adapting is not just a desirable thing, it is often essential to survival itself.

If Netflix (NFLX) had seen the move towards streaming movies and TV and away from their DVD by mail business model as a bummer rather than an opportunity, they would have gone under long ago. Or if Walmart (WMT) had responded to the shift to ecommerce by sticking their head in the sand and believing everything would be okay, they would have gone the way of Radio Shack and Circuit City. Successful companies adapt to circumstances and, in doing so, often emerge leaner, stronger, and more focused.

Take Chipotle Mexican Grill (CMG), for example.

CMG 1 year chart

When the pandemic took hold early last year, Chipotle faced adversity like everyone else, but they were one of the first food chains to respond. They shut down all dining in locations and were one of the first to shift to an online ordering, curbside pick-up, and delivery model. As a result, even in the lockdown hit first and second quarters of 2020 they reported positive EPS. They got through the really tough times and have emerged leaner, fitter, and stronger.

That was clear when they reported earnings after the bell yesterday, showing EPS of $7.46 versus the consensus estimate for $6.46. That is their second consecutive record quarter and is clear evidence that not only is Chipotle growing, but also increasing profitability as it does so. On that basis, nobody should worry about what might otherwise look like stretched multiples of trailing and forward earnings.

My one hesitation about CMG is regarding their ability to expand internationally. Their style of Tex-Mex food is popular here in the States but not so much elsewhere. If that surprises you, keep in mind that people in my native England have no idea why steak and kidney pies aren’t sold in America. We like what we are familiar with, and Tex-Mex is a very American thing.

The numbers show that too. According to their annual report for 2020, Chipotle lost over $17 million on international operations that year. That was a drop in the ocean compared to the $311 million in domestic profits, but if international expansion stalls, it does make the kind of growth that would justify those high multiples a bit more difficult. According to scrapehero.com there are 2,817 U.S. Chipotle locations in America right now. That may sound like a lot, but when you compare it to the 6,500 or so Wendy’s or the 13,442 McDonalds, it is clear that there is room for significant expansion.

While this morning’s massive pop in CMG on that earnings release may make it look like you have missed your opportunity, long-term investors should take a look at a ten- or fifteen-year chart for NFLX in order to understand the potential. Companies that can benefit from changing conditions that destroy others tend to do well over time, and their stocks reflect that. CMG is that kind of stock and, while there might be a short-term retracement over the next couple of days after such a big jump, that only means even these levels will look cheap before too long.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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