We expect Chipotle Mexican Grill, Inc. (CMG) to beat expectations when it reports third-quarter 2014 results on Oct 20. Last quarter, the company posted a positive earnings surprise of 14.75%. Let us see what is in store this quarter.
Why a Likely Positive Surprise?
Our proven model shows that Chipotle Mexican Grill is likely to beat earnings because it has the right combination of two key components.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +0.26%. This is very meaningful and a leading indicator of a likely positive earnings surprise.
Zacks Rank: Chipotle Mexican Grill has a Zacks Rank #2 (Buy). Note that stocks with Zacks Ranks #1, 2 and 3 have a significantly higher chance of beating earnings. Meanwhile, the Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Chipotle Mexican Grill’s Zacks Rank #2 and +0.26% ESP makes us confident of an earnings beat.
What is Driving the Better-Than-Expected Earnings?
Chipotle has been a consistent growth story in the fast casual restaurant sector with its stock climbing 23% year-to-date. The company’s revenues have increased in 2013 as well as in the first half of 2014. In fact, Chipotle’s second-quarter revenues grew more than 28% driven by higher comps.
Chipotle has been witnessing a fairly stable traffic trend over the past few years. In fact, the company posted solid comps in the last quarter despite menu price increases. Given the trend, comps are expected to improve in the upcoming quarter as well.
Menu innovation has been the key to Chipotle’s traffic growth. The company’s latest move toward more organic, sustainably grown or raised, non-GMO (genetically modified organisms), lower carbohydrate ingredients reflects its focus towards meeting consumer demand. The company’s pricing power as well as proven quality products are among the key growth drivers.
Based on the positive outlook for Chipotle, the Zacks Consensus Estimate for the third quarter of 2014 increased 10.9% to $3.86 per share over the last 90 days. For 2014, the Zacks Consensus Estimate moved up 9.2% over the same time frame.
However, the recent increase in food costs is likely to be a headwind, going forward. Also, menu price increase would hurt traffic, going forward.
Other Stocks to Consider
Chipotle Mexican Grill is not the only firm looking up this earnings season. We also anticipate earnings beat from three other companies in the restaurant industry:
Burger King Worldwide, Inc. (BKW) has an Earnings ESP of +3.70% and a Zacks Rank #2.
Dunkin' Brands Group, Inc. (DNKN) has an Earnings ESP of +2.13% and a Zacks Rank #3 (Hold).
Buffalo Wild Wings Inc. (BWLD) has an Earnings ESP of +0.94% and a Zacks Rank #3.
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