What Analysts Think About Chipotle After the CEO Departure

Chipotle Mexican Grill Inc. (NYSE: CMG) had to bite the bullet this week, when CEO Steve Ells finally decided to step down. In his own words this was “the right thing to do” for the company and its shareholders. While a changing of the guard might be catastrophic at some companies, investors hailed this change and sent the stock higher this past week.

Excluding this past week’s move, the stock was down about 26% year to date. However, this week alone saw shares climb 10%, so it looks like Ells is making the right move.

At the same time, Chipotle is beginning the search for a new CEO. The search committee is comprised of directors Robin Hickenlooper and Ali Namvar, as well as Ells. The goal is to identify a new leader with demonstrated turnaround expertise to help address the challenges facing the company, improve execution, build customer trust and drive sales.

While investors cheered this decision, analysts continued to take a sideline on this stock. Only a few analysts weighed in on Chipotle after its announcement, which could mean that some firms don’t see Ells stepping down as an upgrade-worthy change.

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Credit Suisse was one of the first firms to comment on Chipotle. It maintained a Neutral rating with a $275 price target, implying downside of 9% from the most recent closing price of $301.99. Credit Suisse detailed in its report:

We view CEO Ells’ decision to step down as a good first step in the recovery process for CMG. Ells’ strengths as an innovator and visionary did not seem well-suited to the difficult challenge of turning around CMG’s brand perception and operations. However, in the short run, this change (as well as the language in the press release) suggests fundamentals remain weak. CMG faces an uphill battle in its recovery given significant competitive expansion in the fast casual sector in recent years and rising labor costs. Our 4Q17/FY18 forecasts assume +2%/+4% same store sales (SSS), resp. However, we would not be surprised to see comps weaken near-term as the initial lift from queso fades (launched in Sept), compares normalize, and competitor store growth continues. (Each 1% change in SSS = ~5% to annual EPS.) Our model also assumes an ~100bps increase in restaurant margins next year to ~18%. A new CEO may choose to invest in areas such as digital ordering, loyalty, service, food quality, kitchen equipment and/or the store environment, thus delaying this margin recovery. Tax reform is a potential positive for CMG and could drive ~$2/share upside to 2018 EPS (using 25% Fed+state tax rate). However, the prospects of tax reform remain uncertain, and new mgmt. may choose to reinvest these savings. In terms of M&A, we believe CMG’s ~$8bn enterprise value and high multiple make an acquisition unlikely.

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A few other analysts weighed in on Chipotle as well:

• Canaccord Genuity reiterated a Hold rating with a $325 price target.
• Wedbush reiterated a Hold rating with a $290 price target.
• William Blair downgraded it to Market Perform from Outperform.

Shares of Chipotle closed Friday at $307.59, with a consensus analyst price target of $316.89 and a 52-week trading range of $263.00 to $499.00.

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