Chipotle may never fully rebound from E.coli declines, analyst warns
Restaurant chain Chipotle Mexican Grill (CMG) saw a period of volaility this morning after Raymond James downgraded the stock to a Sell-equivalent rating, arguing that its lingering, post-E.coli sales slump could in fact represent a "new normal" for the company. SALES SLUMP HERE TO STAY: Raymond James analyst Brian Vaccaro downgraded Chipotle to Underperform from Market Perform on Tuesday, arguing that the burrito chain's sales levels -- which are still down 15%-20% nearly a year after its E.coli scare -- could represent a "new normal." Vaccaro fears that the decline "reflects a more permanent change in frequency/loyalty among some consumers" rather than just lingering food safety concerns, though he cautions that even if his suspicions prove true, Chipotle's financials would still be "among the strongest" of the companies he covers given its "best-in-class" store margins and sales per square feet. That said, Vaccaro warns that earnings expectations "seem overly optimistic," and he views the stock's risk/reward ratio as skewed to the downside. Looking ahead to a future where Chipotle begins adjusting to a potential "new normal," Vaccaro's 2018 base case models Chipotle shares at $331, while his bear case puts them at $278 and bull case puts them at $468. VANITY FAIR QUESTIONS ACKMAN STAKE: As part of an October 17 Vanity Fair article questioning the investing prowess of Bill Ackman, William Cohan argued that Ackman "will have his hands full" with Chipotle, his latest bet. Chipotle is richly valued and complaints about its food safety persist, Cohan said, with hedge fund manager and long Ackman enemy John Hempton telling him, "if Valeant does what I think it's going to do, which is eventually file bankruptcy, and Herbalife does what I think it's going to do, the position will be very unsurvivable. He's not very good at consumer, and I'm wondering why he's gone into Chipotle as his latest." FTC CLEARS PERSHING INVESTMENT: In notices posted to the agency's website Tuesday, the FTC said it cleared several transactions between Pershing Square and Chipotle. In an email to Bloomberg, Pershing explained that FTC clearance was needed to acquire Chipotle shares to replace certain forward contracts reported in its September 6 stake filing. PRICE ACTION: After dipping below $390 this morning, shares of Chipotle are down fractionally to $393.40 in early afternoon trading. The shares have steadily moved downward over the past week ahead of Chipotle's third quarter report slated for October 25. Over the last 12 months, Chipotle shares have fallen about 45%.