Chipotle Mexican Grill, Inc. (CMG): Buy Burrito Chain’s Breakout for a Chance at Double-Digit Profits

The bullish technical outlook is supported by strong fundamentals.

For the upcoming third quarter, scheduled to be reported in mid-October, analysts project increased customer traffic will push revenue up 17% to $817.96 million from $700.53 million in the comparable year-ago period.

For the full 2013 year, analysts expect increased restaurant traffic due to new store openings will drive up customer buying resulting in $3.18 billion of annual revenue. This number would be a 16.5% increase from last year’s $2.73 billion in sales.

The earnings outlook is equally solid. For the upcoming third quarter, analysts anticipate earnings will rise 22% to $2.77 per share from $2.27 in the comparable year-ago period. Analysts expect full-year 2013 earnings will rise 21% to $10.59 per share from $8.75 last year.

Although the burrito mega-chain is richly valued, the company is financially strong with $483.8 million in cash and no long-term debt. This liquidity gives the company the ability to continue expanding without straining the balance sheet.

Risks to consider: In the most recently reported quarter, Chipotle’s food costs accounted for 33% of total revenue. This percentage was a 100-basis-point increase from the comparable year-ago period and was attributed to higher commodity costs. A continued increase in commodity costs could chip away at Chipotle Mexican Grill, Inc. (NYSE:CMG)’s profits. However, some analysts believe food product costs could soon reverse, and that would mean even stronger margins for the company.

Recommended Trade Setup:

— Buy CMG on a break above $446.05, above $442.40 resistance
— Set stop-loss at $385.95, where the trendline in force from the October 2012 bottom would be broken
— Set initial price target at $549.95 for a potential 23% gain by early 2014

Traders should continue to monitor the shares if they approach this level and, if appropriate, set a higher price target to maximize gains.

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