With Food Safety Concerns Reemerging, BMO Downgrades Chipotle

Despite testing queso, the Chipotle Mexican Grill, Inc. (NYSE: CMG) potential norovirus outbreak led BMO Capital Markets analyst Andrew Strelzik to downgrade the stock to Market Perform. Strelzik set a price target of $350.

“While norovirus at a single location is not overly significant on the surface," Strelzik said, "we believe there is greater uncertainty now as there is a reasonable probability that media coverage will outweigh the severity of the incident and create renewed same-store sales weakness, expanding downside risk within our framework."

3 Reasons Behind The Downgrade

• Food safety concerns are reemerging. It was reported on Tuesday that at least 13 customers were feeling sick after eating at Chipotle's Sterling, Virginia location.
• While norovirus at one location isn't extremely significant, this outbreak could negatively impact Chipotle customers’ psyche. Strelzik expects them to “likely remained fragile and we believe there is a reasonable probability that media coverage of the new illnesses will outweigh the actual severity of the incident and create renewed samestore sales weakness.”
• Chipotle might be no longer able to use pricing as a near-term lever due to comps weakness.

Which Stocks Could Benefit?

“Our previous survey work suggested that CMG’s traffic losses accrued to grocery (42% of respondents indicated greater frequency eating at home), other Mexican restaurants (47%), and to a lesser extent to other restaurants (11%),” Strelzik said.

With that being said, he sees Darden Restaurants, Inc. (NYSE: DRI), McDonald's Corporation (NYSE: MCD), and Panera Bread Co (NASDAQ: PNRA) as stocks that could benefit from a traffic decline at Chipotle.

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