Chipotle Mexican Grill, Inc. (NYSE:CMG) has shown that recovering from a major food-borne illness scandal in the age of social media is a grueling process that is increasingly testing the Street’s faith in CMG stock.
The latest crack in the buy case for Chipotle stock came in the form of a downgrade and price target cut from Morgan Stanley.
Shares hardly collapsed on the news — CMG gapped down 2% at the open — but it is another blow against hopes for share-price stabilization anytime soon.
Worse, the impetus for the downgrade suggests CMG stock could be cooked for a very long time.
Morgan Stanley cut its rating on Chipotle stock to “equal weight” (hold, essentially) from “overweight” (buy) based on new evidence that the market is underestimating how long a top-line rebound is going to take. An online survey of 2,000 consumers led analyst John Glass to conclude that “a full sales recovery to prior peak volumes could take years in our view.”
The analyst’s conviction in this is so strong that he cut his target price to $405 from $500, which is a reduction of almost 20%. More importantly, it’s actually below CMG stock’s current level of about $410 a share.
For what’s it’s worth, Morgan Stanley’s new target gives Chipotle stock implied downside of about 1% in the next year or so.
CMG Stock Still Not a Bargain
You don’t need an analyst action like this to tell you that CMG has yet to become a value play. Just have a look at the price action. Shares are down 45% from their August peak and haven’t come close to halting their downward price momentum.
Indeed, it’s mostly been a long pattern of lower lows and lower highs. The rate of decline of 200-day moving average is accelerating. At the same time, CMG has been trapped under its 50-DMA since March following a brief breakout.
Click to Enlarge On a fundamental basis, Chipotle stock remains surprisingly pricey, changing hands at 35 times forward earnings. That’s too rich for a company with a long-term growth forecast of less than 10% a year. And that’s especially the case when that company is a restaurant chain trying to recover from giving some of its customers food poisoning.
A bet on CMG at such levels is a bet on a huge rebound trade in the next year or so as it cycles against easy companions. The idea is that CMG stock is so beaten down, it is spring-loaded for growth.
Hey, maybe it is. But this latest bit of data from Morgan Stanley suggests that a recovery in sales won’t be happening nearly as soon as many investors think. It’s even possible that it will never. The best case scenario of a rebound play will have to wait.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
