Morgan Stanley Passes On Chipotle For Domino's

Mexican’s out and Italian’s in as Morgan Stanley switches up its menu.

The Rating

Morgan Stanley analyst John Glass upgraded Domino’s Pizza, Inc. DPZ to Overweight and raised his price target from $278 to $283.

He also downgraded Chipotle Mexican Grill, Inc. CMG to Equal-Weight and raised his target from $617 to $658.

The Domino’s Thesis

The Street expects accelerated cannibalization and competition from food-delivery aggregators to depress near-term comps to between 2 percent and 4 percent. Based on recent trends in Domino’s app downloads, Glass disagrees.

“There is some evidence based on third party data on DPZ's 1Q19 app downloads that the market's concerns over decelerating US comps may be overdone,” Glass wrote in a note. “...Spikes in app downloads have historically correlated with periods of comp acceleration and is an interesting counterpoint to the market's current view of US sales deceleration.”

Additionally, he suspects Domino’s is well shielded from food-delivery rivals, given its relatively diversified geography and anticipated price hikes in competing services. (See the analyst's track record here.)

The analyst senses price dislocation as Domino’s underperforms the S&P and its quick-service-restaurant peers. Citing leading unit growth, top market share in U.S. delivery, domestic and global expansion opportunities, and the potential for recapitalization, Glass said Domino’s deserves to trade at a premium over Yum! Brands, Inc. YUM and Dunkin Brands Group Inc DNKN.

The Chipotle Thesis

Meanwhile, Chipotle has lost its flavor. The stock trades up 65 percent year to date, and Glass sees less room for upside.

“Every early indication suggests sales driving initiatives (especially digital/delivery/loyalty) ... are gaining significant traction, but current valuation already discounts much of that expected improvement, in our view,” Glass wrote.

Nonetheless, the analyst remains “constructive” on the stock and raised his price target accordingly. He anticipates 8 percent comps compounded through 2021, with average unit volumes surging from $2 million to $2.5 million and operating margins striking 15 percent.

“Beyond what's visible today (i.e., digital and marketing efforts), there is still food innovation and cost management initiatives that will likely play out in late 2019 or 2020,” Glass wrote. He expects a 1-percentage point increase in comps this quarter reflecting the launch of a loyalty program and momentum in digital orders.”

Price Action

At time of publication, Domino’s traded up 2.2 percent at $261. Chipotle traded flat around $706.48 per share.

Related Links:

JPMorgan Now Prefers Domino's Over Taco Bell

Wedbush No Longer Bearish On Chipotle, Highlights No Negative Catalysts

Photo courtesy of Domino's.