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Chipotle's Delicious, But Will Investors Feel the Same?

NEW YORK (TheStreet) - Fast-casual restaurant darling Chipotle Mexican Grill (CMG - Get Report) reports third-quarter earnings on Thursday after the close, and Wall Street's set the bar high for the burrito maker, not just for the third-quarter, but for the next few years as well.

Chipotle shares currently reflect high investor expectations, specifically regarding accelerating same-store sales growth and earnings growth of 20% or more in 2014, Wells Fargo Securities analyst Jeff Farmer writes in a note on Monday. He rates the company "market perform."

"The Chipotle concept is a consumer favorite and consumer favorites are generally the last to be struck from the decision set list when the sector sees a reduction in restaurant occasions (as seen in recent quarters). We believe it is this consumer affinity that has largely been the driver of the concept's continued market share gains in the current environment," Farmer wrote.

Analysts, according to Thomson Reuters, expect earnings growth of 22% from last year's third quarter, to $2.78 a share. Third quarter revenue is expected to climb 17% year-over-year to $820 million.

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Consensus estimates call for same-store-sales growth of 4.6% at Chipotle, however several analysts say the quarterly growth could be higher. "Our checks of 10% of company locations indicate that [third quarter] and [quarter-to-date same-store sales growth] is ~5%," Wedbush analysts write in a research note on Tuesday.

Chipotle shares are up 47% this year, compared to a 2% gain for Panera Bread (PNRA), another fast-casual name. The S&P 500 is up 21% year to date.

For the upcoming quarter, Farmer expects Chipotle to share sales trends for October and speak about the timing for its increase to menu pricing. He also expects Chipotle to introduce 2014 guidance for same-store sales, unit growth and general and administrative expenses, among other things. Chipotle typically likes to manage investor expectations with conservative numbers.

"We are looking for more of the same in 2014," Farmer wrote in his note. "We expect CMG to point to 'low-single-digit' [same store sales], 175-190 unit openings, 'low-single-digit' commodity inflation and 'flat' G&A costs as a percentage of sales."

Janney Capital Markets analyst Mark Kalinowski believes same-store sales growth could be as high as 5.8% for the quarter. It was one of four reasons the analyst felt comfortable upgrading his rating to "buy" from "neutral," according to an October 11 research note.

Kalinowski is also more positive on the stock for three other reasons. Most importantly, the company has strong long-term growth potential if it enters the breakfast market. Chipotle has not publicly made any announcement suggesting the expansion, but Kalinowski believes growth opportunities abound if Chipotle were to do so.

According to the note, which cites the Eater Philly Web site, Chipotle is quietly testing coffee at one outlet. The note also cites another blog that posted pictures in June of Chipotle serving Mexican-inspired breakfast items at an airport location.

"By far the most compelling reason for Chipotle to test coffee for what may eventually evolve into a national rollout, is because at some point down the road it makes sense for Chipotle to test breakfast," the note said.

The Janney upgrade also assumes lower commodity costs over 2014 and 2015, "which would disproportionately help restaurant companies with 100% company-owned systems, such as Chipotle" and could fuel "sizable upside to existing long-term Street EPS expectations."

Finally, quite simply the food tastes good and consumers love it, the note said.

Analysts are also positive on another part of the growth story - the full rollout of its catering options.

"Our top pick remains CMG given its dominant positioning in the fast casual category (which we believe will continue to outperform). We also like the fact that CMG has more menu pricing power versus the competition and should see a sales lift from the roll-out of catering," Sterne Agee analyst Lynne Collier wrote Wednesday. Collier raised his 12-month price target by $78 to $507 in the note.

In July, Chipotle reported second-quarter earnings that beat Wall Street expectations, sending the shares over the $400 mark the following day.

Net income for the June-ending quarter rose 7.6% to $87.9 million, or $2.82 a share, compared to the year-earlier period. Revenue for the quarter rose 18.2% to $816.8 million, surpassing analysts' expectations of $803 million. Comparable restaurant sales of 5.5% came in higher than Wall Street expected.

The company attributed the strong revenue growth to new stores opened -- a total of 92 for the first half of the year and 1,502 stores overall.

-- Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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