These Analysts Are Still Selling Chipotle, See $375 Target

• In a report issued Thursday, Stephens analysts Will Slabaugh and Billy Sherrill shared an analysts of sales and earnings in the restaurant industry.
• After the second day of public company presentations at the ICR XChange conference, the experts remain “selectively optimistic” on the restaurant industry ahead of the fourth quarter earnings season.

Following the second day of presentations at the ICR conference, analysts at Stephens shared a look into the restaurant industry, on which they remain selectively optimistic ahead of the fourth quarter earnings season. “Many of the over-arching themes were the same (low-end consumer, prominence of value promotions, labor pressures, food cost favorability, etc), but some company-specific highlights could point to outperformance in the near and longer term,” they explained.

Their favorite names after the conference were:

• Fiesta Restaurant Group Inc FRGI
• Chuy's Holdings Inc CHUY
• Sonic Corporation SONC
• Habit Restaurants Inc HABT

On the other hand, the experts remain quite negative on Chipotle Mexican Grill, Inc. CMG. But, why?

Chipotle Bears

Stephens analysts reiterated an Underweight rating and $375 price target on shares of Chipotle Mexican Grill on Thursday.

On the positive front, the experts were encouraged by the company’s plans to give away more entrees to guests coming back to the battered restaurant chain. They also think that a marketing blitz in February could help drive comps, which were down 30 percent for December, slightly up.

However, the firm stands by its bearish thesis. In fact, analysts believe that the recent management commentary should actually drive consensus estimates lower – taking the stock price down with them.

“More specifically, mgmt. was clear that it has no plans to flex the labor line to lessen the margin hit as comps likely fall throughout much of 2016,” the experts expounded.

While this might be a good move for the longer term, the experts believe “the consensus view was that some labor could be taken out of the box to provide modest margin support.” Furthermore, management gave a range of 100-200 basis points, to account for the expected drag from food safety and supply chain investments.

While the analysts believe the Chipotle story could be attractive in 2018 and beyond, they maintain their Underweight rating and $375 target as the market sorts out what they anticipate to be “a material and multi-year earnings impact.”

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.