Chipotle raises prices and now this analyst sees the stock surging 30%

Prices for burritos are up at Chipotle, and the stock price is likely to soon follow, says one Wall Street analyst.

Raymond James analyst Brian Vaccaro upgraded his rating on the restaurant chain to Strong buy from Outperform on Monday. Vaccaro now sees fair value on Chipotle's stock at $1,800.

"We believe recently announced menu price increases (4% in recent weeks, more coming in the fall) create 1) significant upside to second half consensus comp expectations and 2) increased confidence in our above Street '22 earnings per share estimates (Raymond James estimate $35.47 vs. consensus $32.50). We believe Chipotle has a very strong value proposition (chicken burrito still sub-$8 in many markets; and that price increases to cover higher wages will result in limited customer resistance," Vaccaro said in a research note to clients. "While recent wage increases will require an adjustment to management's margin recovery algorithm (expected on 2Q earnings call), we remain confident in its ability to recapture best-in-class store margins (25%+) in 2022 (assuming average unit volumes ~$2.8 million). We also remain bullish on the company's ability to reaccelerate unit growth into the high-single digit percentage range over the next couple of years while sustaining powerful return on investments (40-50% initially, increases to 60%+ in subsequent years)."

Chipotle shares (CMG) rose by as much as 2% in pre-market trading Monday. The stock has fallen about 2% year-to-date.

Chipotle said last week it recently raised menu prices by 4% to compensate for higher labor costs, fueled in large part by worker shortages sweeping across the country. It's an issue Chipotle has chosen to address by lifting the average hourly wage for workers to $15 an hour, explained Chipotle CEO Brian Niccol on Yahoo Finance Live.

"So, we can pass that through. So, it feels like the right thing at the right time," Chipotle CFO Jack Hartung told analysts at a Baird conference.

But despite the latest menu price increase, Chipotle isn't showing any signs of losing customers who are upset with having to pay more for a burrito or salad bowl. It’s quite the contrary, as suggested in Vaccaro's note and others seen by Yahoo Finance lately. With people becoming more mobile after getting their COVID-19 vaccine, they are packing out Chipotle (and other fast-food restaurants) locations for lunch and dinner.

"We are seeing people coming back to the dining rooms," Niccol told Yahoo Finance Live. "It's great to see the line back. It's great to see people back in the restaurant." Niccol added that digital sales (coming off that increase on digital ordered food) have remained strong and the company has strong opportunities to open new restaurants.

Yahoo Finance