Chipotle is surging into earnings out after the bell.
The stock rallied more than 1% on Tuesday, adding to a 77% gain over the past 12 months.
Menu innovation, a strong digital platform and an affordable price point are setting the company up for a solid quarter. Profit is expected to have increased 30% in the fourth quarter, though an earnings decline for fiscal 2020, while sales are anticipated to have risen 12%.
“I love the company I love what they’ve done, I love what they’re doing right now with rolling out these new stores, but I don’t love the valuation,” Mark Tepper, president of Strategic Wealth Partners, told CNBC’s “Trading Nation” on Tuesday. “They’re doing everything right, but the price in my opinion already reflects that.”
Chipotle trades at 69 times forward earnings. The XLY consumer discretionary ETF, which holds Chipotle, is trading with a 33 times multiple.
Gina Sanchez, CEO of Chantico Global and chief market strategist at Lido Advisors, is also wary of Chipotle’s high valuation.
“I actually think that valuation … definitely has a lot of positives priced in. If you look at the forward expectations or even the targets that we’re expecting this evening, I think we’re expecting something like 7% same-store sales growth, opening of 200 new stores and better margins, there’s no way that that gets over [current] forward earnings. I think that’s the big fly in the ointment,” Sanchez said during the same interview.
Tepper does believe in Chipotle’s mobile, digital and delivery strategy, though. To leverage those trends, he prefers a different restaurant chain to Chipotle.
“I would personally rather do that through Wingstop. Now that’s a $4 billion company rather than a $40 billion company,” said Tepper. “They have an asset-like business model that leads to better gross margins. It’s a very quick [return on investment] for franchisees which further drives additional unit growth. It kind of reminds me of Domino’s Pizza about five years ago and we all know what happened to Domino’s over the course of that timeframe, it basically quadrupled so that that’s how I play this trend.”
Domino’s has risen 233% in the past five years and Chipotle has climbed 222%. Wingstop has seen the most growth at 538%.
Disclosure: Strategic Wealth Partners holds WING.
