Analyst: Chipotle Can Fall To $400s

• Chipotle Mexican Grill, Inc. CMG shares are down 28 percent in the last three months, even after rising past $750 on October 13.
• Maxim Group maintained a Hold rating on the company, while reducing the price target from $585 to $495.
• The analyst said that the E. coli outbreak had expanded to more states.

Last Friday, management indicated negative earnings comps for 4Q15 and withdrew earnings comp guidance for 2016. This followed the warning issued by the Centers for Disease Control, or CDC, of the E. coli outbreak having expanded to three additional states, namely Maryland, Illinois, and Pennsylvania.

Chipotle guided to 4Q15E comp guidance of negative 8-11 percent and EPS guidance of $2.45-$2.85, which is significantly short of the pre-release guidance of $4.09.

“We now believe that a return to positive comps is unlikely before the second-half 2016 earnings, and we argue that heightened top-line uncertainty and higher compliance costs warrant a further reduction in multiples,” the Maxim Group report noted.

The Chipotle E. coli outbreak is similar to the outbreak that affected Taco Bell, which is owned by Yum! Brands, Inc. YUM in late 2006 and early 2007. In the latter’s case, comps continued to be negative for four consecutive quarters, the analyst pointed out.

“We believe that margins are likely to come under more pressure than we had modeled previously… With the scope of the E. coli investigation expanding nationwide, we now expect elevated SG&A expenses in the next few quarters as we believe that the company will need to invest heavily to regain the trust of customers and get them to return,” the report added.