Stifel Keeps Selling Chipotle, Can't 'Fathom Pershing's Operational Or Mathematical Investment Thesis'

Pershing Square’s Bill Ackman has started a 9.9 percent activist position in Chipotle Mexican Grill, Inc. (NYSE: CMG). Stifel’s Paul Westra reiterated a Sell rating on Chipotle, with a price target of $215.

The Ackman Stake

“We cannot fathom Pershing’s operational or mathematical investment thesis. Frankly, we predict that Pershing's activist effort is most likely to accelerate and further assure CMG's “tail operational risk” of increasing management and hourly turnover rates,” Westra mentioned.

Related Link: Ackman's Stake In Chipotle Meaningless In The Absence Of Sales Recovery

The analyst pointed out that in order to justify Chipotle’s current stock valuation, either one has to assume that the economic principal of diminishing returns doesn't apply to the brand and/or the mathematical constructs of Discounted Cash Flow don't apply to the stock.

Economic Laws Don’t Apply?

“The law of diminishing returns has been a core principal of economics… and is especially evident within the US restaurant business where concept profitability always follows a well-defined “market-maturation curve”,” Westra stated.

Accordingly, brands usually achieve “Peak Returns” when they achieve an individual market penetration level of 50-60 percent. From here, returns decline over time.

“If this pesky law applies to Brand Chipotle, then regardless of what CMG’s “new-normal” 2017-19 EPS run-rate becomes, we believe CMG will soon afterwards become a +7 percent net-income grower, forever,” the analyst noted.

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