A stock split doesn’t just adjust a publicly traded company’s price and how many shares its investors own. Analysts also need to revise their profit targets to keep up with the new math.
It’s been three weeks since Chipotle Mexican Grill (NYSE: CMG) executed its 50-for-1 stock split. The seamless transaction replaced every single share at the old price with 50 new shares at 2% of the former price. It’s a zero-sum game, but many analysts didn’t make the same tweak on their end.
A splitting headache
Jeffrey Bernstein at Barclays became the latest Wall Street pro to update his price goal after the split. His note on Wednesday morning replaces the earlier target of $2,865 with $58. If this was an actual 50-for-1 revision, the new price would’ve been $57.30. It’s natural to avoid going right of the decimal, but it’s telling that Bernstein chose to round up to $58 instead of taking the shorter path down to $57.
The analyst isn’t bullish on the chain. He’s sticking to his neutral equal weight rating on the shares. His new target is roughly a quarter from where the shares closed on Tuesday. He sees store-level comps easing across the restaurant industry.
Many quick-service concepts are responding to the potential economic softening by taking advantage of easing inflation to introduce value-priced offerings. Chipotle isn’t tossing its hat into this ring, but traditional fast-food chains going this route could disrupt the value proposition that the “food with integrity” chain of 3,479 eateries offers to consumers. Bulls can at least take heart in noting that Bernstein rounded up instead of down following the split.
Rolling along like a burrito
Bernstein at Barclays isn’t the only one who waited weeks after the split to update a firm’s position. Earlier this week, the market saw Brian Mullan at Piper Sandler go the other way. He’s recalibrating what would’ve been a $61.40 target down to $61 on the split adjustment. He sees comps rising roughly 10% for Chipotle for the second quarter that the chain will report next week, ahead of the analyst consensus. However, he’s taking a cautious stance on industry concerns about how recent trends could weigh on sales in the new quarter.
Evercore ISI was the other major firm to update its target. It went for a more precise slice, going from $3,600 to $72 for a perfect 50-for-1 execution. At least Evercore is bullish. The split-adjusted price implies 25% of upside for the shares from current levels.
The revisions were more encouraging late last week. Analysts at Citi and Stephens boosted their price targets by 5% on Friday. Is favorable sentiment stabilizing this quickly?
The wave of updates a couple of weeks after the split itself isn’t surprising. The split itself didn’t require a rush to put out new research notes. With Chipotle eyeing a telltale financial update in the middle of next week, it makes sense to draw lines in the sand now. This will be an important report for the fast-growing chain that put “fast casual” on the map. The second quarter itself should be solid, but the market will be hanging on what Chipotle offers in terms of how recent trends are affecting the chain heading into the second half of this year.
Three months ago, Chipotle was looking for comps to climb in the mid- to high-single-digit range for all of 2024. Plans to expand by another 285 to 315 new units this year would push performance to another year of double-digit growth on the top line. Keep an eye out next week to see if any of this changes in its outlook.
Analysts earlier this year were expecting earnings to outpace revenue growth for the fourth year in a row, but that’s not a given if price wars continue to break out on the low end of the restaurant stock landscape. Draw a circle around July 24 on your calendar if you’re a Chipotle investor. Things are heating up in the kitchen, and volatility will be on the menu by the time the market opens on Thursday of next week.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.
Making Dollars and Sense of Chipotle’s New Price Targets was originally published by The Motley Fool
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