The Downgrade Circus Begins: Wall Street Sours on Chipotle

In reaction to Friday’s CDC warnings that CMG’s problems with poisonous food is spreading, Wall St. is taking an ax to CMG’s price targets and ratings.

Thus far, three firms have downgraded them (Sterne, Maxim and BofA/Merrill), with BofA slashing its price target from $750 to $470.

In a research note out of Maxim, they like competitors in lieu of this fuckery.

In our view, the spread of E. coli to additional states is likely to amplify top-line uncertainty in the near term. The CDC reported that the E. coli outbreak that had closed 43 Chipotle restaurants earlier this month had expanded beyond the Pacific Northwest into four additional states. Health officials in both WA or OR still believe that produce was the likely source of contamination, though no one has found a specific ingredient. CMG tends to use local sourcing of produce wherever possible. However, in light of the broadening geographic scope of the outbreak, there is a possibility that produce may not be the cause. If this is the case, we would not rule out the possibility of finding of additional cases across the United States.

Although all Chipotle restaurants have reopened, we argue that headline risk is likely to depress traffic for an extended period. We argue that the outbreak now threatens to depress CMG’s traffic nationwide more profoundly for the next few quarters. We now expect that the outbreak could reduce comps by as much as 330 bps in 4Q15, 120 bps in 1Q16, and 40 bps in 2Q16. We model a +0.5% comp for 4Q15 but caution that, in a worst-case scenario, CMG could post its first negative quarterly comp since it was spun off from former parent McDonald’s (MCD – $113.91 – NR) in 2006. We believe that CMG is likely to lose market share in the near term to fast-casual peers, such as Qdoba [owned by Jack in the Box (JACK – $73.95 – NR)], Panera Bread (PNRA – $172.68 – Buy), and Zoe’s Kitchen (ZOES – $33.07 – Buy).

We believe that margins are likely to come under more pressure than we had modeled previously. Management has yet to address this directly, but in addition to heightened costs related directly to the outbreak at the affected locations, we believe that management likely will incur costs—at least in the near-term—to provide additional scrutiny of the company’s supply chain management. With the scope of the investigation expanding nationwide, we now expect elevated SG&A expenses in the next few quarters as we believe that the company will need to invest heavily to regain the trust of customers and get them to return.

We are reducing our price target to $585, from $718, to reflect heightened near-term uncertainty on the top line. Although we still regard CMG as a longer-term growth story capable of generating annualized EPS growth of at least 20%, we argue that it is prudent to assign cyclical low multiples until there is more top-line visibility. Our revised $585 price target on CMG is based on a forward P/E ratio target of 24x (reduced from our prior 28x multiple target and representing a cycle-low multiple), as well as our revised 2017E EPS estimate of $24.36. This price target also corresponds to a forward EV/EBITDA ratio of 12.4x using a 2017E base valuation year.

The Chipotle brand is undergoing a severe branding crisis. This is bound to benefit other casual food players, as the company tries to stop fucking poisoning its customers.

As a consumer of CMG, I’ve noticed a significant deterioration in the food quality and the people they hire, as well as store cleanliness. Its become a giant shitstorm and their managers need to fix it before irreversible damage is done.