Chipotle is continuing to turn things around — fueled by a strong earnings report last week, shares hit an all time high on Monday and are up 85% this year. Goldman Sachs sees more upside, naming Chipotle its favorite restaurant stock in a note on Monday.
Goldman initiated coverage of Chipotle with a "buy" rating and a $1,000 price target, currently the highest among Wall Street analysts. Goldman is betting on the company's innovations on the menu, in digital engagement and in delivery.
Digitalization is indeed key, said Jim Cramer, host of CNBC's "Mad Money," when discussing the Goldman call on Monday's "Halftime Report." Chipotle's digital sales nearly doubled last quarter as it rolled out a new loyalty program, and the company now offers delivery from 95% of locations through its partnership with DoorDash.
Chipotle isn't the only stock to benefit from a new CEO investing in digital innovation: in recent years, Starbucks' Kevin Johnson and McDonald's' Steve Easterbrook have turned those companies around as well. Cramer said approvingly, "These guys have all got digitalization. Why I like the Goldman call is the guy who is least far along is [Brian] Niccol at Chipotle. So there's a big runway." Niccol has been on the job for less time than Johnson or Easterbrook but has led the stock to a large percentage gain: 152% in the past 17 months.
Transparency is the other key to Chipotle's success, according to Jon Najarian of Najarian Family Office. Chipotle's biggest struggles have been the food safety scandals it's faced since 2015. In criticizing the company's initial response to the crisis — "they needed to get out in front of it better than they did at that time" — Najarian drew a comparison to the criticism Boeing and its CEO Dennis Muilenburg are now facing for their handling of the 737 Max's safety issues.
Niccol should provide a model for Muilenburg, said Cramer. From the month he joined, "Niccol [was] totally transparent. He didn't badmouth people, he basically said we've got a brand new Chipotle." Though Chipotle has lagged the restaurant sector by 100% since 2015 according to Goldman, its recent surge suggests that it might really be a new era for the company.
The Goldman note also listed McDonald's, Starbucks, Shake Shack and Wingstop as restaurant sector buys. In addition to increased digital engagement and delivery, Goldman sees strong low-end consumer spending and refranchising initiatives as reasons to believe in a fast food rally.
But is the restaurant sector "still recession-proof"? That's the question Joe Terranova of Virtus Investment Partners will be asking. As the note mentions, the popularity of apps like UberEats, DoorDash and GrubHub have benefited these companies so far. But "if third-party promotions are working, at what point do consumers not want to pay more than the $5 or $6 to get that delivery, especially if the economy goes into contraction?"