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Chipotle Stock Has a Lot to Prove on Tuesday

By Rick Munarriz - Oct 21, 2017 at 11:00AM

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At least seven analysts slashed their price targets this week ahead of Tuesday's quarterly report. Like a fly on your burrito, it's not a good sign.

The quarterly report that Chipotle Mexican Grill (CMG -0.04%) investors were initially anticipating, but now are dreading, is just around the corner. The fast-casual chain reports fresh financials after Tuesday's market close, and the market's bracing for the worst. At least seven analysts have slashed their profit targets this week, and it's clearly a bad sign when so many Wall Street veterans are talking down the stock's prospects just ahead of the report. 

It's not just price targets that have been sliding. The past few weeks have also seen analysts scaling back their expectations for the quarter that ended last month. Three months ago, those pros were perched at $2.29 a share, and a month later -- after a mixed quarterly report and bad publicity stemming from another isolated foodborne-illness episode -- that forecast had fallen to $1.91 a share.

The slide didn't end there. Every week or so, an analyst talks down Chipotle's profit power, and a few of this week's lower price targets have been accompanied with earnings estimates being revised lower. Wall Street's consensus average is now calling for Chipotle to check in with a profit of $1.65 a share in Tuesday's quarterly report.

Interior of a Chipotle in California.

Image source: Chipotle.

Hiccups in the burrito assembly line 

Chipotle isn't where it needs to be. Analysts may see revenue rising nearly 10%, to hit $1.14 billion, but that's not as impressive as it may seem given last year's depressed results. Chipotle's top line will likely fall well short of the $1.22 billion it delivered during the same quarter two years ago -- and that was with roughly 400 fewer stores.

The burrito roller also earned $4.59 a share during the third quarter of 2015, so let's make sure we frame the report correctly in a few days. Chipotle stock may be trading for less than half of what it was when it peaked 24 months ago, but it's also earning roughly a third of what it did at its peak. 

Wall Street's souring on the stock, and the prominent fear is that even if the introduction of queso juiced up results, it will be a short-lived novelty, given the largely negative customer reaction to the product. 

Friday's revisions included RBC Capital's David Palmer lowering his target price from $400 to $330 to account for the reduced sales outlook against a backdrop of rising food and labor costs. He's lowering his comparable-store sales forecast from 3% to 2% for all of 2017, a big deal since Chipotle's July guidance was calling for comps to rise in the high single digits for the year. It would be a surprise if Chipotle doesn't hose that forecast down.

Dennis Geiger at UBS also slashed his price goal from $380 to $345 on Friday. Surveys are showing challenging trends and unflattering reviews for the chain and its queso offering. Visibility remains limited, something that's readily apparent given how analysts have been hosing down their earlier model metrics. 

Friday's largest revision came from Jake Bartlett at SunTrust, conceding that his price target should be $390 instead of $505. Despite having one of the higher current price goals for the stock, he sees flat comps and a profit of $1.35 a share for Tuesday's report, well short of where most of even his jaded peers are parked. He's still bullish on the stock, and his near-term encouragement of a queso-promoting TV commercial campaign makes him one of the few analysts with a kind thing to say about Chipotle's all-natural cheesy topping. 

Analysts keep lowering the bar of expectations when it comes to Chipotle. It won't have much of an excuse if it disappoints again.

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