Redemption Remains Just Out Of Chipotle's Grasp

Investing in Chipotle Mexican Grill, Inc. (NYSE: CMG)'s stock in the hopes of a recovery in sales is "risky, especially if expectations are optimistic," analysts at Deutsche Bank commented in a research report. The firm's Brett Levy maintains a Sell rating on Chipotle's stock rating with a price target slashed from $315 to $250.

For many investors the case for investing in Chipotle is simple: regaining part of its lost sales due to a food scare event marks the bare minimum to boost the stock, Levy commented in a research report. But accomplishing this may be out of reach as the casual fast food restaurant chain has to tackle with:

• 1. A difficult competitive landscape.
  2. Brand equity issues.
  3. A poor history of management executing on initiatives.
  4. Concerns over the brand's defensibility.

"With fundamentals returning to 2013 levels and slower growth prospects, we have grown more skeptical of the recovery," Levy wrote.

Looking forward, the analyst has little confidence in Chipotle to demonstrate strength in same-store sales. Accordingly, Levy's 2017 earnings per share estimate is lowered from $7.70 per share to $6.80 per share and 2018's outlook was also lowered from $10.60 per share to $9.90 per share.

Chipotle's stock has traded at an average of around 35x its forward earnings, but given the uncertainty over the brand moving forward, a 25x multiple on 2018's earnings is more appropriate.

"If fundamentals improve, the multiple could rebound," the report also noted. However, if there is a continued deterioration in fundamentals, despite easier compares creating a backdrop where the company could post above average growth, we believe the more muted multiple is appropriate. Should the hyper-growth not materialize (or rate of growth remain more modest), we believe there could be some additional risk to the multiple."

Related Links:

What Should Concern Chipotle Investors The Most? The Pace Of Sales Trends

A Review Of Chipotle's Recovery Finds Challenges Remain

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Image Credit: By Guilhem Vellut from Paris, France [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons