With the recent announcement by the Centers for Disease Control and Prevention (CDC) declaring the E. coli outbreak at Chipotle Mexican Grill, Inc. (NYSE:CMG) restaurants over, the good times for CMG stock should keep on rolling, right? Not so fast, says a Deutsche Bank AG analyst.
In fact, analyst Karen Short is warning investors to stay away from CMG stock. Short downgraded the rating for Chipotle from “Hold” to “Sell,” while maintaining a price target of $400.00. At today’s current price, that would imply a fall in CMG stock of 24%.
Once the darling of investors, Chipotle stock was hit hard last year following the outbreak. CMG stock has since plummeted about 31%.
This month’s earnings call gave investors a chance to take a look at how the outbreak impacted sales. While same-store sales declined 30% in December, a number of analysts upgraded CMG stock on the basis that the outbreak is over. (Source: “Chipotle sales crater 30% in December,” Business Insider, January 6, 2016.)
But Short has a different view and believes that Chipotle’s recovery from the outbreak is already priced into CMG stock, which is the reason for the downgrade.
“We question why Chipotle of today should be valued like Chipotle of yesterday,” Short said. “We still question what a recovery will look like (and when it will materialize). While management has been proactive—putting in place new food safety prep and procedures (in its supply chain and unit-level), and new marketing and compensation programs to regain consistency and customer trust, there is tremendous uncertainty on how well they will be received.” (Source: “Deutsche Bank: Shares of Chipotle Will Fall 24 Percent Over the Next Year,” Yahoo! Finance, February 23, 2016.)
Short also expressed concern about the potential permanent loss of customers and that there were already signs of weakness prior to the outbreak.
I have to disagree with Short’s analysis of Chipotle. The restaurant chain has a loyal following, so I don’t think the company will see a permanent mass exodus of its customer base.
A recent survey by analysts at Bank of America Corp (NYSE:BAC) confirms this: 56% of customers surveyed said their perceptions of Chipotle have not changed over the past few months, while 37% said they had a worse view of the company. (Source: Ibid.) About 10% of responds said they will not be returning to the restaurant, which is not an alarming figure. Plus, I’m sure Chipotle can win a large percentage of them back.
And many major restaurant chains have suffered from an E. coli outbreak and came back from it. McDonald’s Corporation (NYSE:MCD), Taco Bell of Yum! Brands, Inc. (NYSE:YUM) and Jack in the Box Inc. (NASDAQ:JACK) are among them and all of them were able to recover over time.
Chipotle Mexican Grill should be no different.