Chipotle Mexican Grill (CMG) Customers Will Eventually Return, Says Buckingham Research; Coverage Initiated at 'Buy'

(Updated - June 16, 2016 10:48 AM EDT)

Buckingham Research initiated coverage on Chipotle Mexican Grill (NYSE: CMG) with a Buy rating and a price target of $547, implying upside of 40%. Analyst John John Zolidis thinks investors should take advantage of "dislocation" in the stock price following recent food safety issues. While he is cautious on the current quarter, Zolidis thinks customers will eventually return to Chipotle.

"While we have no illusions that the current quarter will not be good (we are expecting a 20% decline in SSS) we believe that ultimately CMG will recover its consumer appeal, higher sales and margins. We believe the positive inflection in key performance metrics will lead investors to again focus on the long-term opportunity and investors should buy the stock ahead of this event," said Zolidis.

"Comps fell 15% in 4QFY15 and 30% in 1QFY16 following well publicized food safety issues. We are estimating a 20% decline in the current quarter (similar to the Street). However, we believe the passage of time, marketing efforts by the company and newer stores maturing will lead to a rebound," continued the analyst.

Zolidis added, "Our investment discipline favors long investments in companies that have 1) high absolute returns, 2) rising returns, or 3) are structurally under-earning. Chipotle’s returns (at the restaurant level) are still falling sequentially but should bottom by 4QFY16. Meanwhile unitlevel ROIC remains among the best in the group. Regarding overall EBITDA margins, we estimate a 9.6% EBITDA margin in FY16, down from an average of 19.6% over FY10-FY15. We believe that EBITDA margins have the potential to eventually recover 800+ bps, setting up strong earnings growth in the future."

Buckingham Research sees 63% upside compare to 8% downside in best/worst case scenarios.

For an analyst ratings summary and ratings history on Chipotle Mexican Grill click here. For more ratings news on Chipotle Mexican Grill click here.

Shares of Chipotle Mexican Grill closed at $390.31 yesterday.

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