With odds rising for an interest rate cut at the September Federal Reserve meeting, investors are preparing for the impact of this upcoming policy shift on various stocks and sectors. Bank of America notes that with inflation cooling toward the Federal Reserve’s target, coupled with signs of the U.S. economy moderating, it's setting up an ideal environment for interest-rate sensitive cyclical stocks:
“This confirmed our thesis that we’re on the path to goldilocks, with macro and inflation back in sync,” after over two years of divergence, said Ohsung Kwon, equity and quant strategist at BofA.
Among the many stocks to consider, three rate-sensitive consumer discretionary and cyclical outperformers stand out: Chipotle Mexican Grill (CMG), Birkenstock (BIRK), and Uber Technologies (UBER). These stocks have recently pulled back from their highs, presenting attractive entry points for savvy investors. Each of these companies is not only “buy”-rated but also has significant room for growth, as evidenced by analysts’ mean price targets.
Whether you’re looking to capitalize on potential rate cuts or seeking solid investments in the consumer discretionary sector, these three stocks offer compelling opportunities. Let’s take a closer look.
1. Chipotle Mexican Grill
Founded in 1993, Chipotle Mexican Grill (CMG), a California-based company, owns and operates its namesake restaurants. It offers a variety of food and beverages, including burritos, burrito bowls, quesadillas, tacos, and salads. Additionally, the company provides delivery and related services through its app and website. The company’s market cap currently stands at $68.4 billion.
While CMG stock is now down roughly 28% from mid-June’s high of $69.26, shares of Chipotle Mexican Grill have still gained about 9% on a year-to-date basis.
On June 26, CMG executed a 50-for-1 stock split, marking one of the largest in New York Stock Exchange history and the first-ever split for the fast-casual restaurant chain. Shareholders of Chipotle who were on record as of June 18 received 49 additional shares for each share they owned.
On July 24, Chipotle shares shot up by about +15% in after-hours trading after the company reported better-than-expected Q2 results. However, shares pared their post-earnings surge after management, during the earnings conference call, disclosed a slowdown in comparable store sales growth to 6% year-over-year for June 2024 and warned of near-term margin pressure, mainly due to increased cost of sales and persistent wage inflation. As a result, the company’s stock fell over 1% in the subsequent trading session.
In Q2, the company’s total revenue increased 18.2% year-over-year to $3.0 billion, driven by higher same-store transaction growth of 8.7% and a 2.4% increase in average check. Notably, Chipotle's total comparable sales growth of 11.1% significantly exceeded the consensus estimate of 7.0%. CMG’s top line surpassed Wall Street’s expectations by $30 million. Digital sales surged, accounting for 35.3% of total food and beverage revenue. Also, the company posted EPS of $0.34 for the quarter, compared to the consensus estimate of $0.32, and up from $0.25 a year ago.
Its operating margin rose to 19.7% from 17.2% a year earlier, surpassing the consensus expectation of 16.3%. Also, the restaurant-level operating margin improved 140 basis points year-over-year to 28.9% during the quarter, exceeding the consensus estimate of 27.5% thanks to sales leverage, although this was partially offset by wage and ingredient inflation. Food, beverage, and packaging costs accounted for 29.4% of sales, in line with the previous year.
It is also important to note that Chipotle opened 52 new company-operated restaurants during the quarter, including 46 Chipotlanes, increasing the total number of restaurants to 3,479. The company bought back $151.4 million worth of stock at an average price of $63.52 per share during the second quarter. In addition, its Board of Directors approved an additional $400 million stock buyback on June 5.
For fiscal 2024, management expects comparable restaurant sales growth to be within the mid to high single-digit range. Also, the company anticipates opening 285 to 315 new restaurants this year, with more than 80% featuring a Chipotlane. At the same time, management projected margin pressures in upcoming quarters.
“We expect our margins will be under pressure for the next couple of quarters,” said CFO Jack Hartung. “Most, if not all of this pressure is seasonal, temporary, or it's an investment that we can offset through efficiencies, and we believe our industry-leading margin structure is still intact,” he added.
Although the near-term outlook for Chipotle is uncertain, it seems to be in a stronger position compared to other major restaurant chains like McDonald's (MCD), which are experiencing greater difficulties due to the ongoing pullback in consumer spending, particularly among lower-income segments.
Analysts tracking CMG forecast a 21% year-over-year increase in its profit to $1.09 per share for fiscal 2024. Moreover, Wall Street expects CMG’s revenue to increase by 14.85% year-over-year, reaching $11.34 billion in fiscal 2024.
In terms of valuation, the stock is currently trading at 45.75 times the consensus earnings estimate for 2024, which is substantially higher than the sector median of 15.75x but below its five-year average of 65.39x.
Analysts have a consensus rating of “Moderate Buy” on Chipotle stock, with a mean target price of $64.06, which indicates an upside potential of about 29% from the stock’s Friday close. Out of 30 analysts covering the stock, 19 analysts recommend a “Strong Buy,” one advises a “Moderate Buy” rating, and the remaining 10 recommend a “Hold.”
2. Birkenstock Holding
With a market capitalization of $10.75 billion, footwear company Birkenstock Holding (BIRK) is renowned for its quality and functionality, founded on the belief that people are meant to walk barefoot on natural, yielding surfaces. Based on this belief, the company has developed a diverse range of footwear products, from traditional models to new styles, attracting buyers with their exceptional quality.
Birkenstock Holding’s stock has pulled back from its June high of $61.83 but remains up 17.4% on a year-to-date basis.
On July 25, BofA upgraded Birkenstock to “Buy” from “Neutral” with a price target of $65, up from $62. The firm believes that in an environment where earnings beats are “becoming increasingly rare,” Birkenstock’s continued sales momentum and robust margins will be rewarded with a higher multiple. A BofA analyst noted that Birkenstock’s consistency “stands out and deserves a premium,” considering the recent struggles of key retail growth stocks.
On July 1, UBS upgraded Birkenstock to “Buy” from “Neutral” with a price target of $85, up from $52. The firm anticipates robust earnings growth and price-to-earnings valuation gains will propel the stock higher over the next 12 months and beyond, expressing “new conviction” in Birkenstock’s upside potential. On the same date, Citi resumed coverage of the stock with a “Buy” rating and a $65 price target.
On May 30, Birkenstock Holding shares surged over 11% after the company reported strong Q2 results. The company reported second-quarter revenue of 481 million euros, representing a 22% increase on a reported basis and a 23% increase on a constant currency basis, driven by sustained strong consumer demand across all segments, channels, and categories. Revenue growth was bolstered by a rise in sales of closed-toe silhouettes, which accounted for over 25% of total revenue, up from the high teens a year ago.
It's also worth noting that DTC revenue increased 32% year-over-year, outpacing the overall company and providing a tailwind to gross margins. Its adjusted earnings per share were 0.41 euros, unchanged year-over-year, due to increased depreciation and amortization from recent capital investments and IPO-related share increase.
Birkenstock’s gross profit margin stood at 56.3%, down 320 basis points compared to the previous year. It’s important to note that most of this decline is attributed to the planned manufacturing capacity expansion as BIRK prepares for further growth. Additionally, a one-time inflation bonus was provided to employees, including those at manufacturing plants. Adjusted EBITDA margin also declined by 470 basis points year-over-year to 33.7%
Notably, the company opened 6 new owned stores during the quarter, increasing the total number of owned retail stores in operation to 57.
Overall, Birkenstock’s second-quarter results highlighted the strength of its business model and the increasing demand for its products, even in a challenging consumer environment. The company has become one of the few essential brands in the wholesale channel to attract store traffic, while direct-to-consumer channels continue to expand as consumers make more deliberate purchasing decisions.
Looking ahead, Birkenstock lifted its full-year guidance due to a strong first half of 2024 and continued demand growth. For fiscal 2024, the company projects revenue of 1.77-1.78 billion euros, representing overall growth of approximately 19% on a reported basis and 20% on a constant currency basis, an increase from its previous guidance of 1.74-1.76 billion euros. Adjusted EBITDA is expected to be 535-545 million euros, an increase from prior guidance of 520-530 million euros, resulting in an adjusted EBITDA margin of 30-30.5%. Management also reaffirmed its medium to long-term profitability goals, targeting a gross profit margin of around 60% and an adjusted EBITDA margin exceeding 30%.
According to Wall Street projections, BIRK is expected to see a 19.62% year-over-year increase in revenue, reaching $1.94 billion in fiscal 2024, with earnings anticipated to grow by 16.17% to $1.39 per share.
In terms of valuation, the company’s forward Price/Earnings ratio stands at 41.20x, which is higher than the sector median of 15.82x.
Overall, analysts have deemed Birkenstock Holding stock a “Strong Buy.” Out of 16 analysts covering the stock, 13 recommend a “Strong Buy,” and the remaining three give a “Hold” rating. The average analyst price target of $64.13 indicates a potential upside of about 12%.
3. Uber Technologies
Valued at a market cap of $134.57 billion, Uber Technologies (UBER) provides a platform that allows users to access transportation and food ordering services. The company is also making significant investments in autonomous driving technologies, which could potentially become a multi-billion-dollar revenue stream in the future.
Shares of Uber Technologies are down about 20% from their March highs, but are still up 5.7% year-to-date.
On July 23, Morgan Stanley analyst Brian Nowak raised the firm’s price target on Uber to $95 from $90 and kept an “Overweight” rating on the shares.
On July 15, Wolfe Research initiated coverage of Uber with an “Outperform” rating and a $90 price target. A Wolfe Research analyst said in a research note that the company has a strong competitive advantage and demonstrates robust fundamental trends, benefiting from stable demand for its core products while exploring growth opportunities through new categories, products, verticals, and geographic markets. The firm also designated Uber as a Top Pick due to its sustainable high-teens revenue growth, significant margin expansion, and robust free cash flows.
On May 13, Uber Technologies and Delivery Hero agreed that Uber would acquire Delivery Hero’s Foodpanda delivery business in Taiwan for $950 million in cash.
Uber released its most recent quarterly earnings report on May 8. In Q1, the company’s total revenue rose 15.1% year-over-year to $10.13 billion, surpassing Wall Street’s expectations by $40 million. Revenue growth was fueled by a 20% year-over-year rise in gross bookings to $37.7 billion, driven by a 25% increase in mobility gross bookings, though this figure slightly missed the consensus estimate of $37.97 billion. Notably, mobility revenue increased by 30% during the quarter, delivery revenue rose by 4%, and freight revenue declined by 4%. At the same time, first-quarter operating EPS of -$0.32 fell significantly short of expectations.
Uber’s adjusted EBITDA surged 82% year-over-year to $1.38 billion, beating Wall Street’s consensus estimate of $1.32 billion. Free cash flow improved to $1.36 billion from $549 million. Among other key metrics, monthly active platform users grew by 15% to 149 million, while trips taken during the quarter increased by 21% to 2.57 billion.
For the second quarter of 2024, management anticipates gross bookings to range between $38.75 billion and $40.25 billion, reflecting 18% to 23% year-over-year growth on a constant currency basis. Also, adjusted EBITDA is projected to be between $1.45 billion and $1.53 billion, representing a year-over-year growth of 58% to 67%. The company is expected to release its Q2 results on Tuesday, Aug. 6, before the market opens.
Analysts tracking UBER expect a 2.3% year-over-year drop in its profit to $0.85 per share for fiscal 2024, while projecting revenue to grow by 15.82% year-over-year to $43.18 billion.
In terms of valuation, priced at 32.67 times forward earnings, the stock trades at a notable premium compared to the sector’s median of 19.40x. However, it has a forward PEG ratio of 0.70x, which is lower than the sector median of 1.80x.
Uber Technologies stock has a consensus “Strong Buy” rating. Out of 41 analysts offering recommendations for the stock, 35 analysts recommend a “Strong Buy,” three advise a “Moderate Buy” rating, and the remaining three give a “Hold” rating. The average target price for UBER stock is $87.08, indicating an upside potential of around 35%.
