For weeks in a row, every new instance of an E.coli outbreak at Chipotle was taken by the BTFD crowd as an opportunity to, well, BTF-E.Coli, and as a result sharp intraday drops on recurring disease outbreak headlines led to prompt recoveries in CMG's price.
However, this may no longer be the case: following yesterday's announcement of yet more cases emerging involving E.coli, one of CMG's biggest defenders, JPM analyst John Ivankoe has thrown in the towel, and first thing this morning downgraded the stock from Buy to Neutral, and lowered his target stock price from $630 to $555, saying that "Our Dec. Observations + New Food Safety Issues Too Much. Estimates Must Bottom to Recommend Stock."
This is the full logic:
- At Chipotle.com on their "Food Safety Update and FAQ" page, one comment summarizes our feelings perfectly: "I've been so supportive lately, but just don’t know how much more of this I can take." Originally, this was a Pacific Northwest issue as 43 stores were closed despite only 11 stores actually causing infections. This spread to a total of 9 states with 47 confirmed Chipotle-related cases (53 total), but the date range remained very narrow: October 19 to November 13. Comparing these 47 confirmed Chipotle cases to the 265,000 confirmed US E. coli cases annually and 48 million total foodborne illness cases seemed like a very small impact at the time.
- We viewed the Boston Norovirus case on December 7 as a phenomenally unlucky coincidence, but one that got tremendous attention due to affecting not only Boston College students, but NCAA basketball players who had to miss a game. The CDC’s strong allusion yesterday that new and probably unrelated cases were found in 3 states from people who contracted the illness November 18-26 and ate at Chipotle within a week prior to their infection is very surprising and disappointing. We anticipate some investor pushback to a downgrade at $522.01 vs the initial post-crisis opening price of $610 on November 2. However, our historical experiences showed these impacts to be relatively minor, short lived, and contained and we felt a downgrade would have been rash as we did not see lasting brand impact at Chipotle. However, the new news flow shows the impact continuing and more importantly a management team that seems to be scrambling for answers. The company does not shy away from cost increases and in fact it sounds like money will attempt to deluge the problem. The Chipotle foodborne illness case will now be studied by restaurant operators, financial professionals, and PR officials for years if not decades to come.
- We believe the F16/17 consensus EPS of $16.65 and $21.15 (as of December 21), respectively, are far too high. In fact, we are lowering our previous F16 estimate from $15.83 to $14.02 and are lowering F17 from $20.09 to $19.13. Although this may seem drastic, 1 point of comp assuming a 50% flow through is worth ~$0.48 or 3.4% to earnings. Our previous 4Q15 comp estimate of -11% implied a December comp of down ~20% since October was positive LSD and November was -16%. We see downside risk to this number and are adjusting our 4Q comp to -13% vs company guidance of down 8-11% (per the December 4th 8- K), which implies December comps down ~25%. Our 4Q15 EPS is now $2.23 vs guidance of $2.45-$2.85 and vs our previous estimate of $2.51. We also adjust quarterly F16 comps, which we now model down 12%, 7%, 4% and up 12% across 1Q to 4Q16 vs our prior estimates of down 7%, 3%, flat and up 8%, respectively. For F17, we now model comps of 6.8% vs the down 2.8% in F16 (previous F16 comp estimate was down 0.5%).
- As we pointed in our last note "More Negative News Flow, Business recovering Albeit from Surprising Low Levels", on December 7, 2015, investors will likely push the company to use its cash + investment balance ($1.6bn as of 3Q15) to buy back shares and exhaust the ~$455m of share repurchase capacity the company has. In the last few minutes of the Mad Money interview, Monty Moran, Co-CEO said that the company was “very aggressive during the softening of the stock to have bought back every share that we can”. In hindsight, a lower share price could have been realized but even $1b, vs the ending cash + investments balance at 3Q15 is worth ~6% of shares outstanding.
JPM's conclusion:
At this point, even rational and informed consumers could potentially be given reason to pause when choosing Chipotle over the plethora of fast casual competition in the marketplace. This new case was not contemplated in our previous investment thesis. In fact, yesterday’s press release could potentially have left people inclined to anticipate the CDC closing the case against Chipotle instead of expanding the investigation against the company.
And as of moment ago, CMG finally hit its 52 week low just below $500.
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Will it rebound once again, just for another E.coli headline to hit as both the BTFDers and the company itself tires of buying back its stock? Find out soon enough.
