With a fresh Wall Street downgrade, it only seems to get worse for Chipotle Mexican Grill, Inc. (CMG) as it struggles to recover from E. coli outbreaks that crushed sales and CMG stock.
Sell calls are rare from analysts. Indeed, Wall Street’s buy recommendations outpace its sell recommendations by about 10-to-1, according to Thomson Reuters. So when an analyst issues a sell, underweight, underperform or some such call on a stock, it’s serious. That’s especially true when it comes to Chipotle stock.
Chipotle management says sales will rebound from the food-borne illness disaster by next year, but Wedbush analyst Nick Setyan disagrees. The analyst cut his view on CMG stock from the equivalent of hold to sell, Tuesday, citing the market’s “overly optimistic outlook” for a recovery in CMG sales. From the note to clients:
“Given the most recent sales disclosures, we do not currently have visibility into the level at which sales have bottomed out (even including promos), let alone visibility into any trajectory at which sales may recover moving forward if there were no promotional activity.”
The critical metric of same-store sales — or sales open at least a year — fell 26% in February and 24% in the first two weeks of March, missing the Street’s estimates. Some analysts may point to the deceleration of same-store sales as a bright spot, but that doesn’t address all of the problems that concern Wedbush.
While sales are reeling, operating expenses are growing as the company tries to regain customers with promotions like giving away millions of free burritos. That means margins are under pressure too.
The bottom line is that in a best-case scenario, Chipotle sales won’t recover until 2018, and even once they do, the company will have to contend with lower profitability, the analyst says.
Another Day, Another Sell Call for Chipotle Stock
Wedbush is hardly alone in its pessimism. This is the fourth time CMG stock has caught a sell rating in little more than a month. The fact that CMG stock racked up a bunch of downgrades in a matter of weeks is alarming to say the least.
InvestorPlace has been down on Chipotle stock since the outbreak began last summer with good reason. As John Divine notes, this is a company in serious trouble. Sure, chains like Yum Brands, Inc.‘s (YUM) Taco Bell and Jack in the Box Inc. (JACK) survived their own diarrhetic disasters, but they depend on a franchise model. That kind of setup spreads out the costs and provides a stream of licensing fees. CMG owns every one of its 2,010 locations.
Other commenters have pointed out that it’s not clear if a company can come back from a food poisoning scandal in the age of social media.
The bottom line is that it’s time to cut your losses if you’re underwater on Chipotle stock. It may recover one day, but it looks like shares are going to get worse before they start to get better.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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