CMG Stock: Is the Worst Over for Chipotle Mexican Grill, Inc.?

cmg stockAnalysts: Upside for CMG Stock

Chipotle Mexican Grill, Inc. (NYSE:CMG) stock is down about 36% since October, when a series of food virus outbreaks hit several of its restaurants across the U.S., leaving dozens of customers ill. Sales have been plummeting ever since the outbreak, but it looks like things might improve for CMG stock. At least that’s the belief of a couple of analysts.

Chipotle is set to report earnings on Tuesday, April 26 and the company says it will experience its first-ever quarterly loss at $1.00 per share or more. That contrasts with the average consensus estimate of a loss of $0.82 per share. Chipotle had previously predicted that earnings for the quarter would break even, but higher-than-anticipated spending on marketing and food safety, including throwing out more food due to more rigorous testing, is weighing on profits.

As bad as that sounds for Chipotle, JPMorgan analysts see more upside than downside for CMG stock. On Thursday, April 15, analyst John Ivankoe and his team at JPMorgan upgraded Chipotle Mexican Grill from “Neutral” to “Overweight” and set their price target to $510.00 from $465.00. (Source: “J.P. Morgan Takes Long View in Valuing Chipotle,” The Wall Street Journal, April 14, 2016.)

Invankoe believes that Chipotle’s same-store sales will increase sequentially off its bottom now that the food safety issues are being put to rest. If you recall, Chipotle recently reported declines of 26.1% and 24.4% in same-store sales in February and the first two weeks of March, respectively. Those numbers sound bad, but that’s nothing compared to January, when same-restaurant sales plunged 36.0%.

For the current first quarter, Invankoe is expecting Chipotle to report a 27.9% decline in same-restaurant sales and another 15% in losses for the second quarter. However, the analyst is taking a long-term view. Invankoe says that same-store sales are improving and that sales growth will finally turn positive in the fourth quarter. (Source: “Chipotle Mexican Grill, Inc. Upgraded Ahead Of Earnings,” ValueWalk, April 14, 2016.)

Ivankoe also said that Chipotle’s food safety issues have cost the burrito chain three years of earnings growth. He said he expects fiscal 2017 earnings to be about the same as they were in fiscal 2014. However, Invankoe see’s Chipotle returning to 20% or more earnings growth by fiscal 2018 and he thinks that CMG stock’s current price doesn’t reflect this. (Source: Ibid.)

Another analyst is also upbeat on CMG stock. On Friday, April 15, Credit Suisse analyst Jason West maintained an “Outperform” rating for Chipotle with a price target of $550.00 per share. (Source: “Chipotle Sentiment ‘Choppy But Recovering,’ Credit Suisse Says,” Benzinga, April 15, 2016.) That implies a 20% uptick in CMG stock from Friday’s opening price.

West also sees improving same-restaurant sales as the basis of his increased price target. He estimates that same-store sales will fall 20% in April and another 18% in the second quarter.

Chipotle is hoping to accelerate those numbers by going on a spending spree to win back customers. The company said that marketing expenses are likely to be much higher than the $50.0 million management said it would initially spend in the first quarter.

The burrito chain announced last month that it is sending out 21 million direct mail coupons for free burritos in the next few weeks. During last month’s free burrito promotion, approximately 5.3 million people downloaded the mobile coupon, with about 2.5 million redeeming the offer. (Source: “Chipotle is giving away more free burritos,” Business Insider, March 16, 2016.)

The Bottom Line on CMG Stock

Same-restaurant sales have plummeted, but it looks like the worst is over. Customers are slowly coming back to restaurants and sales are expected to reach positive territory by the end of this year. If that happens, CMG stock could have some room to run.