Three Top Restaurant Plays for 2021

National and international fast food chains have entered 2021 in a commanding position to recoup the balance of losses posted in 2020. More importantly, they’re likely to grow market share well above prior highs because tens of thousands of smaller operators have been forced out of business as a result of lockdowns and social distancing. It could take years for a new wave of restaurateurs to obtain financing, given the credit damage caused by bankruptcy filings.

Three top restaurant plays for 2021 offer few unexpected opportunities because they’re all household names that have survived and prospered during the pandemic. These big cap players have also established new delivery channels and expanded drive-through facilities in the last year, putting them in perfect positions to pick up the slack left by the departure of your favorite rib joints and greasy spoons.

McDonald’s

Dow component McDonald’s Corp. (MCD) entered a steep correction in the fourth quarter of 2019 and fell to a three-year low in March 2020. The stock completed a round trip into the prior high and broke out in October but the rally failed, yielding mixed action into January. Price action settled on the 200-day moving average in December and has held that level, raising odds it will soon enter a breakout run, possibly fueled by declining infection rates in the United States.

Chipotle Mexican Grill

 Chipotle Mexican Grill (CMG) isn’t well-known in parts of the world but it’s now the second highest-capitalized restaurant chain, behind Mickey D. The burrito purveyor has posted better-than-expected numbers throughout the pandemic and now offers delivery, after resisting that revenue source for years. The stock broke out to an all-time high in December, after a three-month consolidation, and could post outstanding returns for investors in 2021.

Yum China

 Yum China Holdings Inc. (YUMC), Shanghai-based purveyor of KFC, Taco Bell, and Pizza Hut, was spun off from Yum! Brands Inc. (YUM) in November 2016. It’s now a $22 billion operation that’s outperforming the parent, breaking out to a new high in June when China emerged from the COVID-19 pandemic. The stock has continued to post new highs since that time, culminating in Jan. 11’s all-time high at 61.18.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.

Chipotle Mexican Grill At Resistance After Big Breakout

Chipotle Mexican Grill Inc. (CMG) met Q2 2020 earnings and revenue estimates in July, prompting a sell-the-news reaction that held short-term support. Revenue fell 4.8% year-over-year, with comparative sales slumping badly in May and June but rising 2% in June. The popular fast food chain noted a healthy sales escalation throughout July, with a 6.4% increase in comparative restaurant sales.

Chipotle Posts Impressive Return Since 2018

Chipotle Mexican Grill operates 2,580 Mexican-themed fast food restaurants in the United States, along with 39 international locations. The stock was a top NYSE and restaurant sector performer until 2015 when it got blamed for a major food poisoning outbreak that uncovered questionable sanitizing procedures. The downtrend finally bottomed out at a 6-year low in 2018, giving way to a strong recovery that’s gained more than 500% in the last 2½ years.

Bernstein raised their target from $1,300 to $1,600 on Tuesday, with analyst Sara Senatore noting that, “Chipotle Mexican Grill appears to have taken the first small steps toward the margin part of the recovery path with delivery fees; we expect modest pricing could also play a role as could a slacker labor market. Even relatively modest fees support margins. Mobile order ahead has also tripled; reduced delivery support will likely translate into ordering channel shift, not lost traffic.”

Wall Street And Technical Outlook

Wall Street consensus rates the stock as a ‘Moderate Buy’, with an even split of 15 ‘Buy’ and 15 ‘Hold’ recommendations. No analysts are recommending that shareholders sell their positions and move to the sidelines. Price targets currently range from a low of $751 to a street-high $1,600 while Chipotle Mexican Grill is now trading $60 above the median $1,207 target. This placement could put a lid on returns, especially with the astronomical 140.46 price-to-earnings ratio (P/E).

The stock broke out above the 2015 high near 750 in August 2019 and failed the breakout in the first quarter’s pandemic swoon. It bounced back to the rally high in May and broke out once again, entering a rising channel that’s contained price action into August. Fortunately for bulls, this pattern significantly lowers risk because stops can be placed relatively close to price action, allowing an easy exit during the first stages of an intermediate correction.

Chipotle Mexican Grill Q2 Revenue Falls 4.8% But Digital Sales Triple; Target Price $1250

Chipotle Mexican Grill Inc, one of the leading fast-casual restaurant chains, reported that its total revenue fell for the first time in at least 14 quarters by 4.8% to $1.36 billion in the second quarter; however, its digital sales tripled amid the COVID-19 pandemic.

The Mexican fast-casual chain, which features bowls and burritos said its digital sales grew 216.3% year-over-year to $829.3 million, the company’s highest-ever quarterly level, and represented 60.7% of sales. Overall, comparable restaurants sales were down 9.8% but improved in July, growing 6.4%.

Adjusted diluted earnings per share excluding these charges was $0.40, a 90.0% decrease from $3.99, the international chain which has thousands of stores said.

“Our investment in digital over the past few years has provided our customers with convenient access to Chipotle how and where they want it. We’ll continue to invest in elevating the digital experience, including opening more Chipotlanes, while innovating with new culinary offerings such as cauliflower rice, organic beverages and quesadillas,” said Brian Niccol, Chairman and CEO, Chipotle.

“I’m confident we will finish 2020 with good momentum and be well-positioned for the long run.”

Given on-going uncertainty surrounding the future impact of COVID-19 on the broader U.S. economy and any specific impact on Chipotle, the company did not provide fiscal 2020 guidance related to comparable restaurant sales growth, new restaurant openings, and effective full-year tax rate.

Chipotle Mexican Grill shares closed about 2% higher $1,185.27 on Wednesday but are 40% higher so far this year.

“Led by digital, recovery continues to unfold in line with demanding expectations, though perhaps not more. Top-line, LT margin and unit potential all intact; actions to be undertaken in the 3Q to mitigate delivery costs without disrupting sales will be next important data point,” said John Glass equity analyst at Morgan Stanley.

Chipotle Mexican Grill stock forecast

Twenty-two analysts forecast the average price in 12 months at $1,154.94 with a high forecast of $1,450.00 and a low forecast of $688.00. The average price target represents a -2.56% decrease from the last price of $1,185.27. From those 22, 14 analysts rated ‘Buy’, eight rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

Morgan Stanley target price under a bull scenario is $1,250 and $379 under the worst-case scenario. Chipotle Mexican Grill had its price objective upped by stock analysts at RBC to $1,250 from $1,125. Several other equity research analysts have also updated their Chipotle’s stock outlook. SunTrust Banks lifted their price target to $1,336 from $946 and gave the stock a “buy” rating. UBS Group upped their target price on Chipotle Mexican Grill to $1,200 from $850.00.

We second RBC and SunTrust Banks on Chipotle’s stock outlook. We also think it is good to buy at the current level and target $1250 as 50-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity.

Analyst view

“Better sales, mainly off-premise, will be a key driver of margins, but we see other underappreciated opportunities, including labour efficiencies from the ‘second make line’, and supply chain improvements. New management team actively focused on improving top-line through a variety of initiatives (digital, delivery, throughput, new products, marketing, etc.); we think there is potential runway for many of these to support comps in a tougher environment,” said John Glass equity analyst at Morgan Stanley.

“Brand and cultural refresh, further unit growth runway, and revamped marketing are also key parts of the story. Current challenges weighed against high expectations reflected in current stock price, in our view, drives our Equal-weight rating.”

Upside and Downside risks

Economic recovery is quicker than anticipated. Sales driving initiatives could drive better than expected comps/share gains. Store margin improvement above expectations, Morgan Stanley highlighted as upside risks to Chipotle.

SSS levels take longer to recover in a recessionary environment. Valuation demanding; a less defensive consumer discretionary stock. Food safety issues recur (even contained events could be overemphasized by the media), Morgan Stanley highlighted as downside risks.