Chipotle Stock Reflects 'Overly Optimistic Outlook' For Recovery

Wedbush’s Nick Setyan believes the current stock valuation for Chipotle Mexican Grill, Inc. CMG reflects an “overly optimistic outlook” for the company’s path to recovery.

Setyan maintained an Underperform rating on the company, with a price target of $370.

The analyst mentioned that the Q3 results didn't offer support to the optimistic comp recovery expectations, with same-store sales decline of 21.9 percent, a much higher decline than the consensus forecast.

Related Link: This Chipotle Analyst Isn't Convinced About Its Pace Of Sales, Economic Recovery

Chipotle reported its EPS for the quarter at $0.27, significantly below the consensus.

“Sales remain the near-term focus, and the current October QTD trend-line is down 19 percent,” the analyst stated.

2017 Guidance

The initial guidance for 2017 calls for high single digit same-store sales growth, with 20 percent unit level margins and EPS of $10.

However, Setyan pointed out that commodities are now a headwind, while underlying wage inflation has persisted in the mid-single digits.

The analyst also expects second-line investments to affect the opex, while marketing spend is likely to remain elevated. A sales recovery in 2018 appears to be the best-case, rather than the base-case scenario.

“Given the most recent sales disclosures, we do not currently have visibility into the trajectory at which sales may recover absent significant promotional activity,” Setyan added.