Market Overview

Chipotle's Avocado Problem

Chipotle's Avocado Problem

Holy guacamole!

A weak California harvest and Mexican supply shortages are driving a 75-percent spike in avocado prices since July, and it’s striking directly at Chipotle Mexican Grill, Inc. (NYSE: CMG)’s bottom line.

The fruit represents an estimated 10 percent of Chipotle’s cost-of-goods-sold, and every 10-percent increase in prices takes 30 basis points from the fast-casual chain’s margin and 30 cents from its EPS, according to Credit Suisse.

California is the leading avocado grower in the U.S., and a heat wave and drought in the state’s growing regions last summer cut the crop by nearly half, the Los Angeles Times reported earlier this month. The state’s production is expected to total 215 million pounds in 2017 — down 46 percent from the year before, when 401 million pounds of avocados were produced in the Golden State.

Credit Suisse maintains a Neutral on Chipotle and lowered its target price from $335 to $320 Friday.

The Guac Supply Chain

Avocado distributor Calavo Growers, Inc. (NASDAQ: CVGW) has priced from a high of $76.15 on June 9 to a low of $66.55 on July 10 and was trading near the $70 mark midday Friday.

Fresh Del Monte Produce Inc (NYSE: FDP), for which avocados are one piece of a larger overall produce business, has seen volatile trading over the last three months, from a high of $52.13 on June 13 to a dip down to $48 on Aug. 1. The stock hasn’t topped $50 in the month of August.

The company was trading as high as $61.73 in January.

A Corporate Grocery Bill

Just as unfavorable weather is driving up avocado prices — and Chipotle’s costs — other restaurant names are highly dependent on fluctuations in the pricing of key ingredients.

Buffalo Wild Wings (NASDAQ: BWLD) has been dinged by higher chicken wing prices that rose 30 percent year over year, Benzinga reported last month.

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Latest Ratings for CMG

Sep 2020BairdMaintainsOutperform
Sep 2020Truist SecuritiesMaintainsBuy
Sep 2020Piper SandlerMaintainsOverweight

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