Chipotle Mexican Grill Inc. (Ticker Symbol: CMG) spoke on Monday about how President Trump’s proposed tariffs on Mexico are going to impact the company. The Mexican fast-food giant is expecting somewhere around $15 million in additional costs if the tariffs are enacted. Chipotle will be passing those added costs on to the consumer and is expecting to raise burrito costs by five cents. Chief Financial Officer Jack Hartung stated that if the tariffs by Trump are enacted, it will raise the costs of avocados and other produce, reducing margins by 20% to 30%.
This comes on the heels of a solid earnings report that was released at the end of April. Chipotle reported an earnings per share beat of $3.40 per share vs. Wall Street analysts’ expectations of $3.01 per share. Revenue that was reported also came in at a slight beat at $1.31 billion vs. Wall Street’s expectations of $1.27 billion. Same-store sales for the quarter grew at 9.9% vs. Wall Street’s expectations of 7.29%. Chipotle’s digital sales have been steadily increasing, making up 15.7% of the total sales this quarter.
Above is the long term chart for Chipotle’s stock. After the great recession, the stock spent the next two and a half years steadily grinding higher, rallying over 300% from 2010 until the second quarter of 2012. Chipotle spent the next 12-months in a consolidation pattern traders refer to as a bull flag. The stock broke out of its bull flag, to the upside, in the first quarter of 2013 and proceeded to rally over 300%, trading to an all-time high of $758.61 on August 5th, 2015.
After having a massive run-up in the stock price for over 6 years, Chipotle’s stock began to peak late in the fourth quarter of 2015. The stock proceeded to sell off over 50% from its all-time high and began to finally see some price support just under the $300 price level, in the first quarter of 2018. Chipotle’s’ stock then bottomed, forming a bullish divergence pattern, as indicated on the chart by the pink lines, where the stock makes a lower low in price but the Relative Strength Index makes a higher low. Traders and investors sometimes look at divergences for a possible pause within the current trend which can, at times, lead to a reversal as occurred in Chipoltle’s case. The stock broke back above its downtrend at the start of 2019 and has been trading positively for the year since. Currently, Chipotle is trading 16% away from the all-time high it made in 2015.
(Chart above courtesy of www.tipranks.com)
Based on a survey of 23 analysts offering 12-month price targets, the average price target for Chipotle Mexican Grill’s stock is $711.52. According to that number, the stock is priced at a discount relative to Wall Street’s analysts and could be considered undervalued around current levels near $647.64.
Mexico exported more than $8 billion in avocados last year and it is the biggest provider of agricultural produce to the United States. If the tariffs are imposed next week, we will see more companies potentially releasing statements on how the tariffs will be negatively affecting their margins. Investors in Chipotle should look to the tariff deadline for Mexico on June 10th and later to Chiptole’s next earnings release on July 28th, 2019 for fresh news on the company.