Morgan Stanley Upgrades Chipotle (CMG) to Overweight, Downgrades Domino's Pizza (DPZ) and Restaurant Brands International (QSR), Urges Investors to Focus on Quality

January 14, 2022 6:56 AM EST
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Morgan Stanley analyst John Glass is advising investors to focus on quality with Covid and inflation is still seen as two key risks for restaurant demand in 2022.

“The demand signals remain healthy from a macro perspective, supported by robust expected PCE growth and a continued rebound in services spending, which still sits well below pre-Covid levels. But on the other, the reopening trade is now long past, and sales for most restaurants have already recovered from pre- pandemic levels and in many cases are well above already, and lapping the pent-up demand experienced in the 2Q/3Q21 may present Y/Y challenges. And unrelenting inflation and ongoing Covid risks are real and persistent. All this leaves investors with a more difficult set up in '22,” Glass said in a client note.

Along these lines, the analyst made several changes to the firm’s Restaurants portfolio. He upgraded Chipotle Mexican Grill (NYSE: CMG) to Overweight, but downgraded Domino’s Pizza (NYSE: DPZ) to Equal Weight on valuation and Restaurant Brands International (NYSE: QSR) to Underweight.

For Glass, the CMG upgrades is a “risk on” call but he is “taking advantage of the opportunity as shares are off ~20% from highs and our long-term positive view on fundamentals is unchanged, as the best-in-class large-cap growth name in restaurants with pricing power, rising new store returns and digital tailwinds.” The price target is $1,920.00 per share.

On two downgrades, the analyst is skeptical about “further multiple expansion and we expect more normalized comps post-Covid” for DPZ. The price target is $535.00 per share.

Finally, Glass downgraded QSR with a $60.00 per share price target, seen as “a relative call given below peer and history valuation but we worry about a protracted turnaround at BK US, (sales gap to US peers widening, lagging asset upgrades vs. peers, potentially higher capital needs in the system), and a slower recovery for Tim's (Covid sensitive, and the top line recovery to date has lagged improved Canadian mobility).”

By Senad Karaahmetovic | senad@streetinsider.com



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Morgan Stanley, Senad Karaahmetovic