Is Chipotle a Risky Hold in Light of Earnings This Month?

Chipotle Mexican Grill (NYSE: CMG) has pulled off the mother of all comebacks. The fast-casual restaurant operator is moving higher for the fifth month in a row. The shares have soared 82% since bottoming out in February.

The stock is kicking off the new trading week with a boost courtesy of Baird analyst David Tarantino, tapping the stock as one of his firm's Fresh Picks ahead of its second-quarter report in two weeks. He's holding out for a strong showing by Chipotle, eyeing accelerating comps growth into the third quarter and a strong possibility for upward earnings revisions. He has an outperform rating and a $500 price target on the stock, suggesting there's more upside for one of the market's hotter stocks in recent months. He's the latest Wall Street pro to chime in as bullish, but the optimism could be overdone for a turnaround story that has yet to prove that it has actually turned things around.

Sloppy like queso

There's been a lot of buzz since Chipotle nabbed Taco Bell chief Brian Niccol to come in as its new CEO. The market's excited about what Niccol can do to improve daily operations and mix up the menu changes and concept marketing while still working within the chain's signature "food with integrity" mantra.

The one thing that everyone can agree on is that Chipotle has a long way to go before it's truly back. Its previous quarter bears that out. Chipotle may have posted what many considered a blowout report, but it was still earning a little more than half what it was shelling out on the bottom line three years earlier. Even Chipotle's positive comps came with an asterisk, as the 2.2% uptick was the handiwork of a 4.9% increase in average check for the period. Traffic remains an issue, and the positive same-restaurant sales figure is just a matter of inching prices higher and getting folks to pay up to add queso to their order. The comparisons on queso will get harder come September once we've completed the first year of the add-on topping going national.

Analysts have high hopes for the July 26 report. They see revenue climbing 8% to hit $1.26 billion with earnings per share soaring 21% to $2.80. We should frame these expectations correctly. A lot of that top-line growth will be the result of new locations that have opened over the past year. Profitability has also been depressed in recent years. The year-over-year gain may seem impressive, but keep in mind that Chipotle earned $4.45 a share for the same quarter in 2015.

The bullish counter here is that Chipotle's stock is also far removed from its all-time high three years ago. The stock is trading 41% lower than its peak three summers ago, so if it's earning 37% less than it did at that time, the earnings-based valuation is somewhat comparable. The revenue-based valuation is naturally considerably kinder with hundreds of more Chipotle stores open now. However, Chipotle is obviously far removed from its peak margins of 2014 and 2015, and the marketplace has changed. Chipotle is no longer unique. Too many restaurateurs have copied Chipotle's assembly line model to deliver casual-dining quality food with fast-food convenience. Toss in all the things that Chipotle got wrong over the past three years, and it's easy to see why Chipotle may need more than just another great quarter later this month. We're in the early stages of a turnaround, but we're not in the early stages of the stock rally that a successful turnaround would warrant. Chipotle, you have a lot to live up to this month.

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.