Chipotle Stock Gets an Upgrade. A Sales Rebound Is Coming.

Chipotle is well-positioned to accelerate its same-store sales and revenue growth beginning in the latter half of this fiscal year, BMO says. (David Paul Morris/Bloomberg)

Stock in Chipotle Mexican Grill got a spicy kick as a BMO analyst raised his rating on the burrito chain, citing strong U.S. store openings and an improved outlook for sales.

On Friday, BMO analyst Andrew Strelzik upgraded the stock to Outperform from Market Perform. He raised his target for the price to $65 from $56 and reaffirmed an earlier forecast for the company’s earnings.

Chipotle shares edged up 0.7% to $53.90 at Friday’s close. The S&P 500 ended flat.

“We expect improving absolute performance and a widening gap to the industry to warrant a higher multiple,” Strelzik wrote in a research note.

Strelzik also said Chipotle is well-positioned to increase same-store sales and revenue more rapidly in the latter half of this fiscal year. He also praised the fast-casual chain for its continued expansion of U.S. stores, estimating a 10% growth rate “over time.”

Other positives, he said, are the likelihood of gains from Chipotle’s seasonal menu items, improved digital ordering methods, and potential demand from people who are spending more time working from an office, rather than from home.

The upgrade, Strelzik said, isn’t based on his expectations for Chipotle’s second-quarter results, but rather on its long-term potential for growth. Last quarter, both comparable-restaurant sales and transactions decreased 0.4% and 2.3% year over year, respectively. On an earnings call in April, management attributed the drop to a “slowdown in consumer spending” and bad weather.

While second-quarter earnings won’t look pretty, Strelzik said, it shouldn’t come as a surprise to investors or Wall Street. He anticipates same-store sales will decline 3% year over year, slightly worse than the consensus estimate of a 2.9% drop. Strelzik also expects Chipotle will report $3.1 billion in revenue and adjusted earnings per share of 33 cents, both in line with Wall Street’s expectations.

He cautioned investors to expect potential tariff-related pressures—more than Wall Street assumes—saying higher ingredient costs could hurt profitability even if sales improve.

Despite this, he expects the burrito chain to reiterate its full-year guidance and to highlight positive sale trends occurring in the current quarter when it discloses the second-quarter results. The numbers are due after the market closes on Wednesday.

Write to editors@barrons.com.