Is it Finally the Time to Invest in Chipotle Stocks?

Investment Highlights

• An analyst upgraded the rating of Chipotle's shares on Wednesday.
• The stock is priced at 29 times the projected earnings for next year, a historic opportunity for this iconic chain.
• Projections already suggest that comparable sales will return to positive territory in the second half of this year. The narrative is changing.

When Chipotle Mexican Grill (NYSE: CMG) introduced its premium Adobe Ranch sauce in June, the burrito chain claimed it was its first new dressing since the relaunch of its Queso Blanco five years ago. Investors know this is not entirely true. There have been numerous downturns for this restaurant stock. Just check the stock chart from the last five years.

Although Chipotle can be considered a classic growth stock, it has only increased a modest 60% in the last five years. The performance over the last three years is half of that figure. One major reason for these surprisingly pedestrian returns is that Chipotle's shares have lost a quarter of their value over the last year. And it gets worse. If we trace the starting line to mid-June of last year — when the stock reached its all-time high just days before its 50-for-1 stock split — the casual dining chain has fallen 40%.

There are good reasons for these declines, and I will address them. However, has Chipotle fallen enough to make it too attractive to ignore? Forget about Adobe Ranch, Queso Blanco, and even the famous guacamole. Is this the drop that you as an investor have been waiting for? One analyst seems to believe so.

The "rise" in the rating update

Chris Luyckx of Rothschild & Co Redburn upgraded Chipotle's rating on Wednesday. He maintains his previous price target of $55, but with the stock now lower, he is raising his rating from neutral to buy. This represents a short-term upside potential of 32% from current levels, but let’s not consider this as an improvement for convenience. He could also have lowered his price target and maintained a mediocre rating for Chipotle if he felt that the declines were justified.

Luyckx acknowledges that Chipotle is going through a tough period. After years of positive comparable sales, same-store sales have been negative during the first half of this year. The analyst believes that the recent decline is not a sign of structural deficiencies in Chipotle's model. He thinks that the pullback at the store level is cyclical in nature. With a strong brand and a loyal customer base, Chipotle is well positioned to regain traffic and market share once economic concerns begin to ease.

Chipotle itself seems to agree that things will improve sooner rather than later. Speaking on CNBC's Mad Money program last week, CEO Scott Boatwright expressed confidence that the chain can return to mid-single-digit comparable sales growth that it has historically averaged until the recent decline. He argues that Chipotle's marketing approach is already improving and that its overall strategy can be adjusted to succeed in this challenging environment.

The Thursday launch of carne asada —bringing back this limited-time protein for the first time in two years— is a good indicator that Chipotle is not standing still. If there is one thing the chain learned when Brian Niccol was at the helm until last summer, it is that the founder team's rigid menu approach does not work in the new normal.

Chipotle may already be making a turn. After starting the year with a 0.4% decline in comparables during the first three months of the year, followed by a surprising 4% drop in the second quarter, projections issued this summer are encouraging. They anticipate that comparables for all of 2025 will end up roughly flat, implying that store-level sales will be slightly positive in the second half to offset the 2% decline during the first six months of this year.

Valuation Analysis

A key point highlighted by the analyst at Redburn is that Chipotle has positioned itself effectively as a more economical food option in the informal fast food space, which has been dominated by premium salad concepts and expensive Mediterranean establishments that, according to Luyckx's estimates, charge between 25% and 30% more. It is in this context that many fast food chains have abandoned their dollar menus, raising the prices of their flagship offerings to the point where choosing Chipotle only carries a modest premium.

It's not just a meal at Chipotle that has become relatively cheaper. The stock itself is historically economical. Chipotle trades at 31 times future earnings and less than 30 times next year's earnings target. It's not a low multiple for value investors, but Luyckx points out that Chipotle has not traded this low in prospective terms for a whole year since 2015. The obvious counterargument is that future growth projections are lower for the now more mature Chipotle. However, the case for investing in Chipotle is more compelling right now, with the stock declining while its comparables are about to turn positive.