Chipotle slides after analyst says sell on labor costs concerns

Shares of Chipotle Mexican Grill (CMG) are sliding after Bank of America Merrill Lynch analyst Gregory Francort downgraded the stock to Underperform, a sell-equivalent rating, on labor costs concerns. The analyst argued that while the struggling restaurant chain has done a "very strong job" managing labor in a tough sales backdrop, it will have trouble cutting back labor costs any further than it already has. Meanwhile, his peer at Deutsche Bank told investors that. after evaluating the bull case for shares of Chipotle, he is keeping a Sell rating on the name. SELL CHIPOTLE: In a research note to investors this morning, Bank of America Merrill Lynch's Francort downgraded Chipotle to Underperform from Neutral as he believes, assuming no significant tax reform, 2018 and 2019 consensus earnings per share needs to drop at least 10% on labor costs. While the analyst acknowledges Chipotle has done a "very strong job" managing labor in a tough sales backdrop, he thinks this will limit further margin gains. Francort told investors that further gains from trimming hours will prove difficult which limits the opportunity to get labor below 27% of sales even if traffic recovers. The burrito chain should report "OK" third quarter results later this month, he contended, noting that guidance may disappoint and that he remains concerned 2018 consensus earnings expectations incorporate aggressive labor cost assumptions. The analyst lowered his price target on the shares to $285 from $390. BEAR CASE REMAINS: After evaluating the bull case for shares of Chipotle, Deutsche Bank analyst Brett Levy reiterated a Sell rating on the name. While near-term sales may see a lift, the analyst noted that his cautious view on Chipotle's shares is unchanged as he believes brand, operational, financial and valuation issues may continue to weigh on the stock. However, despite being cautious over the intermediate term, Levy admitted management is working hard to regain its momentum. Additionally, the analyst highlighted that he sees a "wide divide across the investor base" with the top five shareholders owning 33% of the company while 18% of the shares are sold short. PRICE ACTION: In afternoon trading, shares of Chipotle have dropped almost 2.5% to $321.32.