Chipotle Mexican Grill, Inc. CMG has had a rough year. With E. coli scares, a subpoena for documents regarding an earlier criminal investigation into food safety measures, spiked labor costs and a disappointing fourth quarter, the Americanized Mexican food joint has had more than its share of bad press.
However, Goldman Sachs has attempted to shed a more constructive light on the company.
The Report
Goldman Sachs' analysts wrote, "What's changed: Helped by a reversal in restricted stock accounting, CMG reported a better than expected 4Q; however, the real focus was on 2016 commentary. There were a number of negatives on the cost front […] with very little encouraging comments on the top-line front."
The note continued, "That said, we believe marketing initiatives can be effective relatively quickly, so, in addition to compelling longer-term valuation, the next data point (an intra-quarter sales update) can be positive."
Based upon that thesis, Goldman lowered its 2016-2018 EPS estimates from $9.69/$19.46/$24.54 to $6.68/$16.52/$21.63, lowered its 12-month PT by $50 to $550, but maintained a Buy rating on the stock.
Implications Of The Report
Goldman Sachs outlined three implications of its estimates and justifications:
- Margins Will Be Affected: "We sense CMG sees some risk in not getting sales back sooner rather than later – this helps explain the aggressiveness of the marketing campaign and an ROI calculation that is not 1-2 quarters in nature," the report explained. "We agree spend there should be exogenous to Chipotle's issues. We also see an element of over-earning in terms of store level labor and the supply chain […] being rolled back."
- Once Sales Trajectory Returns, The Focus Should Increase On Costs
- The Long-Term Value Should Maintain Its Appeal: "We continue to adjust our long-term DCF for reductions in terminal margins," the company explained, "but continue to see an equity value above $630/share."
In commenting upon the firm's constructive thesis, Goldman Sachs stated, "We would become less constructive if (1) recent food safety issues remain in the press, (2) survey data shows a delayed reaction to food safety issues, or (3) we do not see the expected sales recovery post food safety."
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