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Instant Analysis: Deutsche Bank Says Chipotle Could Fall 24%

By Jeremy Bowman - Feb 26, 2016 at 8:40AM

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Chipotle shares barely registered the analyst's steep downgrade. Is there reason to be concerned about the health of the Mexican chain's business outlook?

What happened?
Deutsche Bank slapped a fat sell rating on Chipotle Mexican Grill (CMG -0.04%) this week, downgrading it from hold. Putting a $400 price target on the burrito chain's shares, Deutsche Bank said it sees them falling by as much as 24% over the next year.  

Analyst Karen Short said that, with the stock already up more than 25% from its bottom last month, much of the chain's recovery is already priced in. "We question why Chipotle of today should be valued like Chipotle of yesterday," her team said. "We still question what a recovery will look like (and when it will materialize)."

Short did give credit to Chipotle's management team for putting in place corrective food safety protocols, but also said that there was "tremendous uncertainty" around its ability to regain customers' trust and bring them back in the door.  

Does it matter?
Generally, when a stock like Chipotle gets a high-profile downgrade, it knocks shares at least a few points lower. That didn't happen this time. Shares were down more than 2% in pre-market trading on Tuesday in response to the downgrade, but prices quickly recovered despite the broad market falling that day. That seems to indicate solid investor confidence in Chipotle.

Short does have a point, however. Chipotle's recovery will be neither quick nor easy. The company already forecast breakeven earnings per share for the current quarter, and after same-store sales fell 36% in January, it seems unlikely that comps will rise until the company begins to lap the E. coli outbreak in November. That's been the experience of other chains that have had similar food safety scares. A survey by Bank of America said nearly half of respondents had lowered their opinion of Chipotle in the last few months, while 10% said they wouldn't return to the burrito chain, indicating the company has work to do if it's going to win those customers back.

Still, a 24% drop in the stock seems unlikely. Chipotle is on the road to recovery and the market clearly believes in it. After its a free burrito promotion and its decision to close stores for a company-wide food safety meeting, management has begun to change the narrative, and the E. coli outbreak is becoming more distant.

Barring any surprise news -- like another food-borne illness outbreak -- the company should eventually see sales levels return to the levels they were at before. It will be a long slog, but Chipotle -- the company and the stock -- will get there with time.

 

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Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,306.80 (-0.04%) $0.46
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$31.56 (1.38%) $0.43
Deutsche Bank Stock Quote
Deutsche Bank
DB
$8.46 (-3.20%) $0.28

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