This post is part of the On the Margin blog.
In August of last year, stock in Chipotle Mexican Grill closed at $758 a share, an all-time high. The Denver-based burrito chain was enjoying surging sales, a stellar reputation among competitors, and a do-no-wrong view among analysts. Some actively wondered if the chain’s stock would hit four figures.
Soon thereafter, sales began to weaken, and then the chain suffered from a series of food safety incidents, one on top of the other, that generated a media frenzy. The stock plunged, falling below $400 at one point. It recovered some but, as of Monday, it’s down nearly 40 percent from that August high.
That hasn’t erased faith in the company with the analyst community. Of the 26 analysts who cover the company, according to Nasdaq, nine of them have Buy or Strong Buy ratings. Only two analysts believe investors should sell the stock.
That’s not unusual. In general, analysts tend to have rose-colored glasses when it comes to the stocks they cover.
According to Bloomberg, for instance, only 5 percent of the ratings of 1,778 U.S. companies worth at least $1 billion are “Sell” ratings. Some analysts are reluctant to put out Sell ratings in part out of fear of losing access to a publicly traded company.
And in one respect, analysts in aggregate are uncertain where the company will go. According to a Nation’s Restaurant News analysis, analysts’ price targets for the company averaged just a 5-percent increase from the closing price on Thursday. By comparison, their average prediction for all restaurant industry stocks was 13-percent growth over Thursday close.
At the same time, however, many observers believe the analysts are too bullish. Chipotle has struggled to get customers in the door since its food safety concerns hit just after Halloween last year. Many believe the chain did lasting damage to its brand from which it will take a long time to recover — and some think it will never recover its lost profitability.
“It is very reasonable to give Chipotle a break for the 2016 results,” said Nick Mazing, founder and portfolio manager with Ampera Capital. “Every market participant knows it is a year to rebuild customer trust and bring traffic back. However, I do think that the sell-side analysts, in aggregate, are taking it too easy on the company for 2017 and beyond.”
We’ve already noted that Chipotle’s sales decline from its food safety concerns has put it in uncharted territory. Its first quarter sales decline is on track to be worse, and for a longer period of time, than any other food safety related problem over the past 25 years, at least.
And there are some analysts who believe it will take longer for the chain to recover lost sales than many think — due largely to a more fickle nature among today’s consumers. “We believe the recovery from food safety issues is unprecedented in today’s world of instant social media and fickle Millennial consumers who love the brand for its ‘food with integrity,’” wrote Jefferies Analyst Andy Barish. He said Jefferies’ own survey work recently “reinforces this view,” and said that same store sales and earnings improvement will be slower than expected.
Barish has a $350 price target on the chain, which suggests another 20 percent decline in the stock.
At the same time, the time to buy a stock is after it has declined, and it would only be natural that a decline of the magnitude Chipotle has endured in the past few months would yield a few Buy ratings.
Piper Jaffray Analyst Nicole Miller Regan, for instance, has a $590 price target on the stock, which would be a 31-percent increase. She noted that, despite same-store sales pressure, the chain’s return on new locations remains twice as strong as the chain’s competitors.
She also wrote that it’s a matter of when, and “not if,” sales trends at the chain improve. “We expect human capital to play a tremendous role in this recovery and we believe store-level employees continue to champion the brand,” Miller Regan wrote.
Then again, the most common analyst view when it comes to Chipotle is neutral. After all, it remains uncertain where Chipotle goes from here. Earlier this month, same-store sales took a 6-percent hit when a location in Massachusetts was closed for just a couple of days after a couple of workers there got sick.
“It takes time to heal,” wrote Nomura Analyst Mark Kalinowski — once a major Chipotle bull but now has a neutral rating on the stock — “and you can’t hurry time.”
Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze