Fast-Casual Pair Trade? Nomura Starts Starbucks At Buy, Chipotle At Neutral

Nomura initiated coverage of Starbucks Corporation SBUX with a Buy rating and $70 price target, citing the company's digital initiatives, favorable market-share trends and a beneficial coffee-cost outlook.

The Seattle-based coffee retailer has investing heavily to improve its mobile presence, a move that could help keep America's same-store sales momentum robust. In January, the company extended its Mobile Order & Pay program to Vancouver, B.C., allowing customers to pre-order their favorite beverages and food in over 130 locations in the city.

Analyst Mark Kalinowski noted that Starbucks faces risks including the ongoing battle of results versus Street expectations, an eventual leadership transition and the law of large numbers.

Kalinowski sees Starbucks' earnings for fiscal 2016 and fiscal 2017 at $1.90 a share and $2.19 a share, respectively, while Street's consensus estimate stands at $1.89 and $2.19.

Related Link: Citi Raises Target On Chipotle To $605

Neutral On Chipotle

Kalinowski also started coverage of restaurant operator Chipotle Mexican Grill, Inc. CMG with a Neutral rating and target price of $420. Chipotle is the owner of fast-casual concepts, including its namesake brand, which is the second-largest fast-casual restaurant concept in the United States in terms of domestic system-wide sales.

"Positives and opportunities include differentiated brand positioning ('the gourmet restaurant where you eat with your hands'), the likelihood of market share gains for years to come, and potential increases in mobile and online ordering," the analyst said.

However, Chipotle faces the risks in the form of low visibility into sales recovery, the potential for further food sourcing and safety issues, the ongoing battle of results versus Street expectations, rising labor costs and valuation.

Kalinowski's EPS estimate for 2016 and 2017 is $7.90 and $14.00, respectively, while consensus estimate amounts to $8.47 and $14.70 a share. For both Starbucks and Chipotle, the analyst's five-year annualized EPS growth projection is 18 percent.

Shares of Starbucks were up 24 percent, while Chipotle lost 23 percent in the last one year. The broader S&P 500 index were down 9 percent in the same period.