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Why Merrill Lynch Sees Chipotle Shares Dropping Another $100

Chris Lange

Published: November 23, 2015 10:52 am

Last Updated: January 13, 2020 4:52 pm

Chipotle Mexican Grill Inc. (NYSE: CMG) has been a premier stock to own in the past decade. Its shares saw a meteoric rise during this time and the company set the standard for fast casual dining. However, a recent outbreak of E. coli threatens the company’s well-being at the moment.

Earlier in the month, we suggested that Chipotle could fall about $200 or more when news of E. coli broke. So far shares have dropped roughly $100 from that time, and they would only have to go down $100 more for this prediction to come true.

Other key analysts have weighed in on the outbreak and Chipotle’s current position as well. Merrill Lynch lowered the company to an Underperform rating from Buy based on lower sales and earnings per share (EPS) estimates tied to E. coli issues. The price objective also dropped to $470 from $750, implying a downside of 16% from current prices.

Chipotle is one of the few high-growth restaurant stocks and has numerous appealing attributes, including brand differentiation, an outstanding sales track record, unit expansion with high returns, and a strong balance sheet. Long-term appealing factors are likely to be outweighed by the risks and uncertainty caused by recent food safety issues. The brand could be more sensitive to such issues due to its Food with Integrity positioning.

In Merrill Lynch’s report, the firm detailed:

There was news on Friday afternoon from the Center for Disease Control (CDC) that Chipotle’s E.coli issue was evident in three additional states – CA, OH and NY. This prompts us to sharply lower our estimates. The greater uncertainty and risk around the E.coli issue is the driving factor behind our rating change. The CDC report indicated surprisingly few illnesses in the three newly identified states (four in total in three markets), but we expect consumer concern and reaction to drive 4Q same store sales negative. The new states are far more significant markets for CMG (18% of restaurants in CA, 8.5% in OH, and 5% in NY) and are geographically widespread, indicating a national as opposed to a regional issue that the original Pacific Northwest problem (43 restaurants in OR and WA) seemed to be. The cause of the E.coli has not been identified.

The firm also lowered its fourth quarter same store sales estimate to down 4% from its previous up 3% projection. Merrill Lynch thinks October and early November comps were up 1% to 2% and the firm assumes that comps for the balance of the fourth quarter will be down about 10%.

As a result, Merrill Lynch is lowering its fourth quarter EPS estimate to $3.76 from $4.48, the 2015 EPS estimate to $16.68 from $17.40, and the 2016 EPS estimate to $18.75 from $20.60. The firm did not expect this food safety issue to be a long term negative for Chipotle, but the short term impact could be magnified by the food halo that the company’s Food with Integrity positioning has created for the brand.

Shares of Chipotle were up nearly 5% at $562.39 in early trading Monday morning, with a consensus analyst price target of $743.04 and a 52-week trading range of $532.03 to $758.61.

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