This Chipotle Analyst Sees Further Upside In 2023 As The Cost Of Dining In Overtakes Dining Out

Food inflation is now up 11.2% for the 12 months ending in September, and the figure has a striking detail: food at home inflation is up 13%, while food away from home is only up 8.5% over the last 12 months.

Here's why one analyst is bullish on a restaurant stock against today's inflationary backdrop. 

The Chipotle Mexican Grill Bull Case: Oppenheimer analyst Brian Bittner reiterated an Outperform rating on Chipotle Mexican Grill (NYSE: CMG) Monday with an $1,800 price target.

The consensus is overly discounting the equation for margins and EPS power through 2023, the analyst said. 

The improvement in margins is being overlooked, as Chipotle’s commodities such as chicken prices are down 30%, and avocados have declined by 40% since the second quarter of 2022 earnings release, he said. 

Bittner forecast for third-quarter 2022 earnings to show restaurant margins of 25.3% versus the consensus of 25.2% and earnings per share of $9.36 versus consensus estimates of $9.18.

Due to nervousness surrounding the buy side for the fourth quarter of 2022, the stock presents a solid buying opportunity, as Chipotle’s business model is more defensive than perceived, Bittner said. 

Oppenheimer sees minimal risk of cost of goods sold (COGS) margins exceeding by more than 30% in 2023. Therefore, a lower food cost environment could drive less aggressive price increases, leading to better traffic and an improving the investment narrative toward the stock.

The Inflationary Backdrop: Although consumer staples tend to do better during times of economic downturns, high inflationary pressures are creating demand destruction, inventory issues and pricing pressures, as producer costs are also elevated.

This caused general merchandise retailer Target (NYSE: TGT) to miss its first and second quarter earnings estimates by roughly 29% and 47%, respectively.

Food and staples retailers firms such as Walmart (NYSE: WMT) and Costco Wholesale (NASDAQ: COST) are seeing slower growth in earnings over the first half of 2022.

Meanwhile, consumers feel more purchasing power when eating out at certain restaurants, as the inflationary pressures are not as high.

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Chipotle Competitors: As consumers are faced with higher pressures when grocery shopping, they are finding themselves spending more for less.

Although this is still the case when going out to eat, as food inflation is red hot, the data suggests the consumer has more purchasing power when eating away from home.

If food pressures can further decrease, firms such as Yum Brands (NYSE: YUM), McDonald’s (NYSE: MCD), Restaurant Brands International (NYSE: QSR) and Darden Restaurants (NYSE: DRI) could benefit from higher traffic.