Chipotle Mexican Grill, Inc. (CMG) received a reiteration of a rare and dreaded sell rating from a Wall Street analyst Monday, adding yet another headwind for CMG stock.
Deutsche Bank’s Brett Levy affirmed his sell rating and slashed his target price on Chipotle stock to $340 from $360, noting that the “dramatic sales decline” suggests that some customers might be “lost for good.”
The new price target implies downside of 15% in the next 12 months or so. After dropping close to 16% so far this year — and by 45% since the beginning of the outbreak — any floor on Chipotle remains stubbornly elusive.
Although other restaurant chains have come back from food poisoning scandals, CMG is the first to have to do so in the age of social media, and that makes many observers pessimistic about its chances.
Indeed, of the 35 analysts covering Chipotle stock, four have it at sell. It’s hard to find stocks that are viewed less favorably than CMG stock. And sentiment is likely even worse than that. It’s far more common for an analyst to pull his or her rating only back to hold. In CMG’s case, 18 analysts call it a hold.
The Street’s average price target of $460 leaves implies upside of not quite 15% in the next year, but that comes with a wide range. The top target stands at $605, while the lowest is $285. Opinions are more divided than usual.
CMG Stock Has a Lot to Prove
So far, it hasn’t shown much progress. The retreat in business has even stripped Chipotle of its status as the most popular Mexican chain restaurant. Last week, a Harris Poll revealed that Moe’s Southwest Grill, which with less than half the number of locations as Chipotle, is the No. 1 brand for Mexican-inspired food.
This is a badly tarnished brand. In addition to Moe’s, consumers reported a more positive view of Qdoba, Baja Fresh and Yum! Brand, Inc.‘s (YUM) Taco Bell. That’s right — the once dominant chain finds itself in fifth place.
As unappetizing as CMG stock might appear, there is a case to be made for it as a big-time rebound play. Any time a name gets so badly beaten down, there’s a chance that it could be spring loaded for a big bounce in the future.
In CMG’s case, analysts expect sales and earnings per share to continue to collapse for the remainder of this year. Fiscal 2017 is when they expect a large comeback in the top and bottom lines. Perhaps the worst is behind the stock.
But CMG had better prove it soon. Same-store sales need to pare their losses definitively before you can make a credible case for a rebound. That hasn’t happened yet. Valuation is another concern. Shares trade at 34 times forward earnings on a long-term growth forecast of 12%.
It sure doesn’t look like the risks of CMG taking longer to recover — to say nothing of thrive — are fully baked in.
That’s a full valuation for many growth stocks — even the ones not fighting for their lives. There’s simply too little visibility to feel confident in CMG stock as a rebound bet at such a price.
Save yourself the stress and forget about it for now. It’s better to be late than wrong.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.