Swap Coffee For Burritos? Analyst Recommends Starbucks While Chipotle Attempts To Restore Consumer Confidence

• Shares of Chipotle Mexican Grill, Inc. CMG lost 20 percent in the last three months, while Starbucks Corporation SBUX shares are up 12 percent over the same period.
• Argus’ John Staszak downgraded the rating on Chipotle from Buy to Hold, while maintaining a Buy rating on Starbucks.
• Investors looking for an investment in large-cap restaurant stocks should opt for Starbucks and wait for Chipotle to resolve its food safety related issues, Staszaki stated.

Recent outbreaks of E.coli and novovirus at the restaurants of Chipotle have had a negative impact on the company’s reputation as well as its share price. The company witnessed a 20 percent drop in its sales after the initial E.coli outbreak, making it withdraw its sales guidance for 2016.

“We note that the CMG share price is closely correlated with same-store sales growth. Given prospects for lower comps over the next 3-4 quarters, we expect CMG to trade at lower-than-usual multiples,” analyst John Staszaki wrote.

Although Chipotle’s October comps were up slightly before the food safety issue arose, its fourth quarter comps are likely to be down 10 percent. The EPS estimates for 2015 and 2016 have been reduced from $17.50 to $16.00 and from $20.80 to $18.20, respectively.

Staszaki believes that Chipotle’s reputation of serving “Food with Integrity” has been damaged by the recent spate of food safety issues. The company’s future growth prospects will be driven by management’s ability to address the current food safety problems and restoring consumer confidence.

Investors looking to invest in a large-cap restaurant stock should opt for Starbucks, the Argus report noted, while adding that Chipotle’s food safety issues appear temporary and the company is poised to achieve strong growth over time.