Services

What Analysts Are Saying About Chipotle After Earnings and Norovirus Scare

Chris Lange

Published: July 26, 2017 12:40 pm

Last Updated: January 12, 2020 9:44 am

Chipotle Mexican Grill Inc. (NYSE: CMG) reported its most recent quarterly results after the markets closed Tuesday, following a week of bad press surrounding the burrito chain’s most recent health scare. Naturally with so much figurative blood in the water, analysts were excited to update their calls on the controversy-ridden restaurant.

24/7 Wall St. has included some very brief highlights from the earnings report, as well as what analysts are saying about Chipotle after the report.

Chipotle posted $2.32 in earnings per share (EPS) and $1.17 billion in revenue. That compared with consensus estimates from Thomson Reuters of $2.18 in EPS and revenue of $1.19 billion. In the same period of last year, it posted EPS of $0.87 and $998.38 million in revenue.

During this quarter, comparable restaurant sales increased 8.1%, and the restaurant level operating margin was 18.8% in the quarter, an improvement from 15.5% in the second quarter of 2016.

Jefferies took this opportunity to raise Chipotle to a Hold rating from Underperform with a $350 price target. Essentially the firm believes that the current valuation and consensus now reflect the reality of Chipotle’s path to recovery. The brokerage firm detailed in its report:

On a 2-year stacked basis, same-store sales (SSS) in the first two weeks of July were trending near -17.5%, implying mid s-d or lower SSS early in 3Q, but trends fell by 5.5% following the norovirus incident in VA. We expect SSS to remain choppy and have been slower to ramp with ads less effective than desired, with Chipotle acknowledging that visibility remains low, despite maintaining its 2017 high single digit SSS guide. Traffic is likely recovering slower than expected with 2Q SSS of +8.1% below us/consensus of +12%/+9.5%, which included +5.3% traffic and +2.8% avg. check. Traffic was negatively impacted by 30-50 basis points related to cyber security issues during the quarter and Chipotle is only now moving forward with initiatives around menu innovation (queso tests) and technology enhancements. We are lowering our 3Q/2017 SSS to +5%/+8.7% from +10%/+11%, but maintain our +3% SSS for 2018.

Wedbush believes something similar, effectively that the current valuation appropriately reflects an improving top-line trajectory, offset by limited visibility into Chipotle’s near- and medium-term margin trajectory. The firm maintained a Neutral rating for Chipotle but lowered its price target to $350. Wedbush detailed:

Management commentary indicated July trends prior to the Norovirus incident last week were trending up low- to mid-single digits. After Norovirus, trends decelerated by ~5%, implying flat-to-negative SSS growth over the past few days. The Q3 consensus SSS growth expectation was 6.7%. 2017 guidance remains for high-single-digit SSS growth, with consensus currently at 9.1%. 195-210 new restaurants in 2017 also remains the target.

While management expected another round of price increases similar to the recent 1.3% in magnitude in Q4 prior to last week, they may need to push back the time frame pending how the post-Norovirus transaction trends develop. We’ve already built in the price increase in Q4, so risk to our margin expectations exists should the Q4 price increase fail to take place. We’re slightly increasing our unitlevel margin estimate to 19.0% from 18.8% in 2017, and slightly decreasing our 2018 estimate from 20.4% to 20.3%.

A few other analysts weighed in on the stock as well:

• Morgan Stanley lowered its price target to $380 from $445.
• RBC has a Sector Perform rating and cut its price target to $400 from $500.
• SunTrust Robinson Humphrey reiterated a Buy but cut its price target from $520 to $505.
• Telsey Advisory has an Outperform rating and cut its price target to $420 from $440.
• Maxim lowered its price target to $435 from $470.
• Mizuho reiterated a Buy rating but cut its price target from $533 to $450.
• UBS cut its price target to $380 from $445.

Shares of Chipotle were last seen down 1.5% at $343.42 on Wednesday, with a consensus analyst price target of $419.81 and a 52-week range of $336.52 to $499.00.