Chipotle Mexican Grill shares climbed for the second consecutive day on the back of an upgrade from one firm. The fast casual dining chain has been struggling amid multiple food poisoning cases and a recently announced federal probe, but health officials could be close to giving the “all clear,” believes CLSA analysts Diane Geissler and Jeremy Scott.
Chipotle Mexican Grill upgraded to Buy
In a report dated Jan. 14, Geissler and Scott said they upgraded Chipotle from Outperform to Buy after seeing management’s recent presentation. They cut their price target from $645 in December to $506 per share on Jan. 7. Their new price target is $536, which suggests upside of 25%.
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The CLSA analysts said that while they can’t be certain that health officials are about to give their blessing to Chipotle Mexican Grill following the multi-state E. coli outbreak in November, they are confident that it will happen soon. The Centers for Disease Control states that the “all clear” can only be given based on the “last meal date.”
Chipotle’s epidemiologist found that the first E. coli outbreak came from a single supply source and believes that the risk associated with the outbreak was contained after November, said Geissler and Scott. It’s believed the second outbreak that happened in the Midwest late last month was also connected to the source from the first outbreak. The CLSA team believes that the risk of another E. coli outbreak from this same strain is low at this point.
Chipotle sets new marketing plan
Chipotle Mexican Grill is planning to launch several huge marketing campaigns in the second week of February, making the timing apt as it attempts to regain the confidence of diners. The fast casual dining chain has also recently said it is adopting new food safety measures like testing its supply sources more often, centralizing its kitchens, and adding steps like blanching to eliminate possible sources of food-borne illness.
Other steps include using more fresh ingredients and adding more microbial kill steps. The restaurant chain also intends to step up its store-level protocols in terms of sanitation and employee health and run more DNA samples on food batches.
The CLSA team estimates that these new steps will reduce Chipotle’s restaurant margins by 100 to 200 basis points, but they added that this is probably not as bad as what the market was expecting. Geissler and Scott believe Wall Street was estimating that these steps would reduce restaurant margins closer to the average margin among fast casual restaurants, which is about 20% or 700 basis points.
They also raised their earnings estimate for fiscal 2017 from $18.06 to $19.15 per share. They think this estimate could still be conservative though as protein sources are undergoing deflation.
Shares of Chipotle Mexican Grill climbed by as much as 6.01% to $454 per share in afternoon trading today.