Chipotle Mexican Grill (NYSE:CMG) gained a new ally today, and it came from a most unexpected source. On the eve of the company's third-quarter financial report, Bank of America Merrill Lynch analyst Gregory Francfort has done an abrupt about-face.

The analyst, who has had a sell rating on Chipotle shares for more than two years, suddenly jumped on the bandwagon, upgrading the burrito slinger and significantly boosting the firm's price target. The call may be a little late, however, as Chipotle has been one of the most successful restaurant stocks over the past couple of years, more than tripling its share price since bottoming in early 2018.

Let's take a look at the analysts' reasoning and see what to expect when the company reports earnings after the market close on Tuesday, Oct. 22.

A partially eaten Chipotle burrito shown with a side of guacamole and tortilla chips.

Image source: Chipotle.

Throwing in the towel

The analyst has been bearish on Chipotle since late 2017, after its stock fell to four-year lows. At the time, the company was still dealing with a rash of foodborne illness outbreaks that began in late 2015. Francfort has been reticent to upgrade the stock, citing challenges that remained and concerns that additional upside would be difficult to come by.

Francfort finally relented on Friday, upgrading Chipotle to neutral (hold) from underperform (sell). He also hiked the stock's price target by a whopping 44%, to $850 up from $590. The analyst said that the company has, over time, addressed a number of concerns that initially resulted in the bearish call.

"Chipotle has added delivery sales layers, improved customer-facing digital platforms, and turning over the management ranks to improve headquarter and store level operations," Francfort wrote in a note to clients. He cited a sharp increase in digital sales, which tend to carry higher order totals than those of dine-in customers and are responsible for the majority of the company's growth so far in 2019. 

Several other data points could boost Chipotle's results. One is a 59% decline in the price of avocados since the second quarter, which will likely result in improved margins during the second half of the year, as about half of Chipotle's customers add a side of guacamole to their orders. Chipotle took advantage of the lower prices by celebrating National Avocado Day in July, which resulted in the biggest guac day in the company's history, selling more than 802,000 sides of guacamole. The company also celebrated National Guacamole Day in September, awarding double points to members of its rewards program. 

Another development was Chipotle's decision to launch carne asada nationwide in September, after successful pilots in several cities. The new menu item will be available for a limited time, helping to drive strong market interest. 

Earnings are just around the corner

Chipotle had a strong second quarter, growing revenue to $1.4 billion, up 13% year over year. This came on the back of a 10% increase in comparable-store sales, the result of a 7% jump in transactions and a 3.5% increase in the average check. This drove earnings per share (EPS) to $3.22, up nearly 92% compared to the prior-year quarter. 

The company has historically been cagey about its outlook, providing only broad strokes for the year. On the basis of its strong results in the second quarter, Chipotle boosted its full-year forecast. The company now expects comparable sales to grow in the "high single digits," up from its prior range of mid-to-high single digits.

Analysts' expectations are a little more precise, though they're only shown for context. Consensus estimates are calling for revenue of $1.38 billion, which would represent growth of about 15% year over year and adjusted EPS of $3.19, up 47% compared to the prior-year quarter.  

Given Chipotle's remarkable recovery over the past two years, this analyst's creed seems to be, "Better late than never." We'll see if the enthusiasm is warranted when Chipotle reports on Tuesday.