OPPENHEIMER: Here’s why Wall Street is too optimistic about Chipotle

Wall Street is too optimistic on Chipotle, Oppenheimer said Monday, suggesting the fast-casual burrito chain will miss expectations for the coming earnings.

According to Oppenheimer, Wall Street expects Chipotle to earn $11 per share for fiscal-year 2019, and $15 per share for fiscal-year 2020. The most bullish analysts on the Street are saying earnings per share could even grow to $20 per share in 2020. But Oppenheimer analyst Brian Bittner argues the rest of Wall Street is “too optimistic” and that those numbers are “difficult to achieve.”

“We respect management’s marketing, digital and new- product strategies, but don’t view them as transformative enough (all elements considered) to boost Average Unit Volumes to levels needed for margin upside, earnings revisions and even further valuation multiple expansion,” Bittner said in a note sent out to clients on Monday.

The Wall Street consensus of $15 EPS indicates a higher profit margin coming from a lower cost of labor and goods, Bittner said. He believes that is”unlikely” by his calculation.

The Street assumes labor costs only grow around 3% year-over-year going forward, versus a 4% increase this year, Bittner said. But that estimate is too low given that wage inflation is in the 5-6% range, and Chipotle’s new menu items are likely to require incremental training costs, he added.

For cost of goods, the company said in its second-quarter earnings that its food costs decreased 150 basis points to 32.6% of revenue, thanks to cheaper avocado prices. But Bittner believes this margin boost from sliding avocado price is unlikely to repeat, and that food costs will no longer bring much pricing power. 

Reflecting on all of those calculations, Bittner downgraded his rating to “underperform” from “perform” and trimmed his EPS estimate for fiscal-year 2019 to $11.14 a share, and for 2020 to $13.74 per share. Bittner also has a price target of $400, 11% below where shares were currently trading.

That suggests Chipotle will trade 29 times its EPS in the trailing 12 to 18 months. “Other restaurants with similar Same-Store Sales/unit growth assumptions trade at 22-27 times, so we still apply a healthy premium,” Bittner said.