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Analysts Sharply Divided On Chipotle After Earnings

Analysts Sharply Divided On Chipotle After Earnings
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Investors were bracing for a hit on Tuesday as Chipotle Mexican Grill, Inc. (NYSE: CMG) reported its fourth-quarter and fiscal year 2015 results in the wake of a pair of health scandals in the latter half of 2015.

The company is planning a marketing blitz to start the first week of February to restore consumer confidence, a campaign that will see the company spend four times the normal amount on marketing in the first quarter.

Analysts offered a rainbow of responses to the earnings report, with many lowering price targets and earnings estimates for 2016.  Some claimed that Chipotle's situation was unique and might not follow typical food-safety comeback narratives. 

Others, however, saw historical evidence for share prices to snap back if Chipotle can reclaim lost sales.

Related Link: Wells Fargo's Farmer Upgrades Chipotle, Says History Shows Quick Comeback Is Possible

'Unprecedented' Situation

Firms such as Deutsche Bank, Stifel, Raymond James, and Jefferies saw Chipotle's position as specific to the company. Some highlighted that previous major food-safety scandals have occurred in Taco Bell and KFC restaurants, chains without the reputation for quality and customer loyalty Chipotle has cultivated.

Deutsche Bank held that bearish position. "This situation is unprecedented - no concept has been so loved and so abandoned," wrote Deutsche Bank analysts Karen Short and Brett Levy.

Short and Levy maintained a Hold rating for the company, kept a price target of $400 for fiscal year 2016 and noted that sales were slowing even before news of either the E. Coli or norovirus outbreaks broke.

Stifel analysts shared the concern that Chipotle's growth was slowing ahead of the food-safety crises. "We believe that even without the unfortunate E.Coli and norovirus food safety incidents, that 2015 would likely have marked the arrival of “peak returns” at Chipotle," wrote analysts Paul Westra and William Smith. Westra and Smith reduced their 2016 EPS from $13.45 to $9.00 and their 2016 revenue estimate from $4.38 billion to $4.32 billion.

An analyst from Raymond James was similarly bearish. Despite noting that Chipotle's upcoming marketing campaign might cause same-store sales to trend up slightly, "the pace of recovery remains quite uncertain," analyst Brian Vaccaro wrote. Vaccaro cut the firm's EPS estimate for 2016 nearly in half, from $12.60 to $7.60. Raymond James estimated Chipotle would pull in $4.2 billion in revenue this fiscal year, down from a previous estimate of $4.6 billion.

Jefferies analysts Andy Barish, Alexander Slagle and Reena Krishnan saw "little precedence" for same-store sales to normalize soon. They lowered their price target from $420 to $390 and issued a Hold rating. Jeffries dropped its 2016 revenue estimate from $4.8 billion to $4.2 billion and its EPS estimate from $14.01 to $5.67.

'Fervent' Customer Base

Some firms saw massive potential in Chipotle's woes, and pointed to historical precedent that saw restaurants regaining share price after food scandals.

Wells Fargo offered a strikingly bullish take on Chipotle's earnings. The firm upgraded the stock to Outperform and analysts noted that "two decades of food safety case studies indicate share price recoveries closely track the recapture of lost same-store-sales."

The firm lowered its 2016 EPS estimate from $12.00 to $10.04 provided a revenue estimate of $4.6 billion, both more bullish than many of their peers. 

"While the E.coli pushback has been severe, Chipotle has among the most fervent customer bases in the industry, " the analysts concluded. "Our confidence in Chipotle’s ability to drive improved SSS trends in coming quarters rests squarely on CMG’s aggressive efforts to claw back lost sales."

SunTrust Robinson Humphrey expects Chipotle's marketing campaign to drive a "steep recovery." However, the outlet lowered its EPS estimate for 2016 to $9.56 and offered a 2016 revenue estimate of $4.5 billion.

Chipotle's shares were down Wednesday afternoon, trading lower by 3 percent for the day.

Latest Ratings for CMG

Oct 2016RBC CapitalMaintainsOutperform
Oct 2016Raymond JamesDowngradesMarket PerformUnderperform
Oct 2016NomuraMaintainsNeutral

View More Analyst Ratings for CMG
View the Latest Analyst Ratings

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