Earnings Watch: Chipotle earnings preview: Avocado prices are moderating and sales of carne asada are strong

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Chipotle Mexican Grill Inc. is scheduled to announce its third-quarter earnings on Tuesday and analysts think avocados and carne asada will give the results a boost.

KeyBanc Capital Markets says there was a 50% year-over-year rise in Haas avocado prices in the second quarter, but inflation moderated in the third quarter.

“During Q2, Chipotle saw a 150 basis-point headwind from higher prices, which was partially offset by an incremental $2 million in cost-saving initiatives,” analysts led by Eric Gonzalez wrote in a note.

“For Q3, we model a 20 basis-point increase in food costs, consistent with the company’s guidance, which already accounted for easing avocado inflation and cost savings. However with prices now below year-ago levels, we see potential for earnings-per-share upside in Q4 and early 2020.”

KeyBanc rates Chipotle CMG, +0.64%   stock overweight with an $870 price target.

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With the avocado price problem starting to subside, Wedbush is upbeat about other ingredients on Chipotle’s shopping list.

“We view the remainder of the supply chain as largely insulated given the relative size of Chipotle’s protein and produce suppliers,” analysts wrote.

Wedbush rates Chipotle stock outperform with a $980 price target.

On Sept. 19, Chipotle introduced carne asada and sales seem to be going better than SunTrust Robinson Humphrey analyst Jake Bartlett thought they would, which could be “driving check and upside to same-store sales estimates.”

FactSet is guiding for 9.2% same-store sales growth. Chipotle has beaten FactSet’s same-store sales expectations the last three quarters.

Menu innovation is a key part of the strategy to continue Chipotle’s growth and Bartlett says carne asada is well received.

“In 20 stores across the country, we found employees telling customers that carne asada was selling equal to or much more than steak and, in some cases, almost as much as chicken,” according to the SunTrust note. “While somewhat anecdotal and a small sample size, we believe that carne asada may be boosting check by more than our prior estimate of 150 basis points.”

Carne asada is priced 6% above steak and barbacoa and 21% higher than chicken, with chicken the far more popular protein, analysts said.

SunTrust rates Chipotle stock buy with a $900 price target.

Chipotle has an average hold stock rating, according to 34 analysts polled by FactSet. Chipotle has an average price target of $800.39.

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Here’s what to watch for in Chipotle’s earnings:

Earnings: FactSet is guiding for earnings per share of $3.18, up from $2.16 last year.

Estimize, which crowdsources estimates from sell-side and buy-side analyst, hedge-fund managers, executives, academics and others, expects per-share earnings of $3.26.

Chipotle has beat FactSet earnings expectations the last seven quarters.

Sales: FactSet forecasts sales of $1.38 billion, up from $1.23 billion last year.

Estimize is guiding for sales of $1.39 billion.

Chipotle has beaten the FactSet sales estimates for the last three quarters.

Stock: Chipotle stock is up 9.7% for the last three months, and has rallied 92% over the past year.

The S&P 500 index SPX, +0.09%   is up nearly 7% for the past 12 months.

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Other things to look for:

-Delivery is also giving Chipotle a bump. Stifel expects same-store sales to rise 10% to 11% with delivery available from about 95% of the company’s locations, or about 2,400 restaurants.

“The company continues to utilize free delivery incentives, sponsored either by DoorDash or itself, building upon its baseline demand following the offer, so we expect it will remain a key promotional tool,” Stifel wrote.

Stifel rates Chipotle stock hold with a $755 target price.

-In addition to delivery, analysts think the Chipotle’s loyalty program could grow to be a bigger asset. Chipotle said in September that it had about 6 million Rewards members.

“Beyond 2019, we believe the continuing growth in digital, supported by traction in loyalty, menu innovation, and marketing spend could enable a multiyear streak of mid-to-high single-digit same-store sales growth,” wrote Wedbush.