Argus Still Concerned With Impact Of Chipotle Outbreaks; Favors Starbucks

Argus’ John Staszak maintained a Hold rating for Chipotle Mexican Grill, Inc CMG stating that the company’s image had been tarnished by a spate of food safety issues. He recommended Buy rated Starbucks Corporation SBUX for investors seeking large-cap restaurant stocks.

Although Chipotle had achieved rapid sales growth and benefitted from expansion of its units, its reputation of serving ‘Food with Integrity’ had been damaged. Staszak expects the company’s stock to trade in a narrow range over the next 12 months.

The company’s 4Q revenues declined 7 percent y/y to $998 million and its same store sales were down 14.6 percent, from 16.1 percent growth in the year-ago quarter. The decline in comps sales was largely driven by negative publicity related to food-borne illnesses at a number of Chipotle restaurants. Chipotle reported its EPS at $2.17, down from the year-ago level of $3.84.

Management announced that the Centers for Disease Control had completed an investigation into E-coli outbreaks at the company’s restaurants, while a federal criminal probe relating to food safety incident at a California restaurant had broadened into a national investigation.

Staszak mentioned that Chipotle continues to be strong financially, with no long-term debt and strong cash flows that should suffice to fund the company’s capital spending requirements.

Chipotle’s share price is closely correlated with same store sales growth. “Given prospects for lower comps over the next 3-4 quarters, we see limited near-term upside for CMG and are maintaining our HOLD,” the Argus report stated.