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Chipotle Set for 2022 Rebound Despite Covid, Other Headwinds: Keybanc

Chipotle saw a nearly 30% decline in the fourth quarter, giving investors an attractive entry point, according to Keybanc.
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Analysts at Keybanc are cautious when it comes to their outlook for restaurants in 2022 as comparisons to 2021 could be tough.

But the stock of Chipotle  (CMG) - Get Chipotle Mexican Grill, Inc. Report, which the investment bank rates overweight, is one of its key ideas for the year. 

Keybanc analyst Eric Gonzalez matches the overweight rating with a $1,850 price target, representing 30% upside from the stock's previous closing price of $1,420. 

The investment firm says the setup for restaurants in 2022 is "far from perfect," due to headwinds like a rise in Covid-19 infections, cost inflation, tough multiyear comparisons and limited earnings visibility.

But "we view the sector's lackluster performance since the start of the year as an opportunity to get more constructive on select high-quality names,"  said. 

Weighted by market capitalization, restaurant stocks underperformed the wider market (a 20% increase vs a 27% rise for the S&P 500).

That's' an uncharacteristic negative gap for a group that has performed between in-line to better than the index over the past decade, according to Keybanc. 

Keybanc's Bullish Outlook on Chipotle

Chipotle, the Newport Beach, Calif., burrito chain, had a rough end to 2021, falling nearly 30% after reaching a year-to-date high of $1,944 on Sept. 23. 

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But Keybanc sees this as just more room to run for the chain, which it calls a "best-in-class fast-casual restaurant."

"Chipotle possesses top-tier/accelerating unit-growth prospects, a robust innovation pipeline, and significant pricing power, given its favorable customer demographics (e.g., high income) that should help it protect margins from rising costs," Gonzalez said. 

Chipotle, along with the firm's other two top picks, Papa John's  (PZZA) - Get Papa John's International, Inc. Report and Dine Brands  (DIN) - Get Dine Brands Global, Inc. Report, can differentiate itself from the competition with menu innovation and advertising, has outsized check growth due to price increases, and is speeding up new restaurant openings. 

2021 Presents Tough Comparisons

Commodity inflation reached the high-single-digit to low-double-digit range for most chains in the second half. But while commodity prices are cyclical, key inputs are still well above historical averages. 

Keybanc expects Chipotle to see mid-single-digit commodity inflation that will worsen in the near term. 

Meanwhile, the combination of higher wages and job availability mixed with low savings rates will drive workers back into the labor force. 

The average hourly pay rate accelerated in the second half of 2021, with wages increasing 16% and 15% at full-service and limited-service restaurants, respectively, in November. 

Meanwhile, most restaurant executives see wage-rate inflation staying elevated with the drop in the labor pool, but wage rate inflation is unlikely to continue at its current rate much longer, according to Keybanc.

At last check, Chipotle shares were down 2% to $1,391 a share.