Chipotle's Expectations Now At A Trough; Wedbush Upgrades

Chipotle Mexican Grill, Inc. CMG shares did not see a post-election “bounce,” rising only 1 percent since November 8 as compared to the 14 percent appreciation among its fast casual peers and a 13 percent increase in the overall publicly traded restaurants space.

Wedbush’s Nick Setyan upgraded the rating on the company from Underperform to Neutral, while raising the price target from $370 to $400.

Expectations Lowered

Following the Q3 results being announced, the 2017 consensus EPS expectation was revised down by 9 percent to below the estimate, suggesting that the Street was “clearly discounting a relatively low probability of management’s $10 2017 EPS target,” the analyst mentioned.

However, recent checks suggest there could be an improvement in the Q4 comps, which might be in line with the consensus for the first time since Chipotle faced its foodborne illness crises.

The Q4 consensus comp expectations currently stand at -3.5 percent, well below the estimate of -2 percent.

Expectations Realistic

“We interpret CEO Steve Ells’ recent comments as a pivot from what has been a focus on regaining lost sales over the past year to a focus on margins at current sales run rates,” Setyan stated.

The analyst believes with this recent shift in focus from recovery in sales to margins, the lowered expectations are more realistic.

“Relative to peers, Chipotle’s largest medium- to long-term opportunity is lower labor costs, with other OpEx being the largest near-term opportunity as marketing and promotional spend declines,” the analyst went on to say.

Setyan expects the labor leverage to be ahead of the previous estimate in 2018, while seeing a price increase in 2018 as well.