Wells Fargo Upgrades Chipotle Mexican Grill (CMG) to Outperform
Wells Fargo upgraded Chipotle Mexican Grill (NYSE: CMG) from Market Perform to Outperform with a price target range of $500-$530 up from $420-$450.
Analyst Jeff Farmer commented, "We’re upgrading shares to Outperform from Market Perform as two decades of food safety case studies indicate share price recoveries closely track the recapture of lost same-store-sales (SSS), and (2) the majority of restaurant concepts that have experienced a food safety issue see the return of sustained SSS growth within 12-15 months of the incident."
The analyst cited five points to their upgrade:
- Thesis point 1: The handful of applicable restaurant food safety case studies over the last 25 years are imperfect, but demonstrate: (1) peak SSS declines can be cut in half 6 months after the incident, and (2) sustained SSS growth can return 12-15 months after the incident.
- Thesis point 2: SSS recoveries, when captured at the quarter in which a multi-quarter SSS decline delivers a first quarter of improved sequential SSS performance, have historically resulted in very healthy share price appreciation over the first four quarters of the improved SSS period (we expect Q2 2016 to represent CMG’s first quarter of a multi-quarter run of improving sequential SSS).
- Thesis point 3: Our confidence in Chipotle’s ability to drive improved SSS trends in coming quarters rests squarely on CMG’s aggressive efforts to claw back lost sales, which are expected to begin next week.
- Thesis point 4: With news of the greater-than-expected G&A cost guidance for 2016 (+$65 million yr/yr), and high-level guidance on 120bps of incremental marketing costs expected in H1 2016, we believe that CMG’s downward SSS and EPS revision cycle has largely run its course.
- Thesis point 5: We believe investors should be reminded of how powerful Chipotle’s unit-level economics model is.
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 $475.67 yesterday.