Shares of Chipotle Mexican Grill (CMG) dropped in morning trading after receiving a downgrade to Underperform at BMO Capital, which cited the high exposure to the African swine fever. The analyst also downgraded Bloomin' Brands (BLMN) with a similar rationale. Meanwhile, Hormel Foods (HRL) could also be pressured by African swine fever following its earnings report, an analyst at Stephens stated.
CHIPOTLE CUT TO SELL: BMO Capital analyst Andrew Strelzik downgraded Chipotle Mexican Grill to Underperform, a sell-equivalent rating, from Market Perform and lowered his price target for the shares to $620 from $675. In a research note to investors, Strelzik said African swine fever will likely create a "meaningful, multi-year upswing" in protein prices, and Chipotle is among the restaurants most at risk. "It has the greatest pork exposure in our coverage (estimated at 10%), and our work suggests that CMG realizes commodity inflation with little to no lag," the analyst said, adding that this suggests it "could be among the earliest to realize the impacts of African Swine Fever, potentially as early as 3Q19."
Further, Strelzik contended that African swine fever likely will create a "meaningful, multi-year upswing in protein prices and the potential magnitude and duration of impact across the restaurant industry is underestimated." He said this adds another layer of downside risk to his cautious casual dining view as company-owned models are most at risk.
The BMO analyst said Bloomin' Brands and Texas Roadhouse (TXRH) are also at risk because of their high exposure to pork and other protein products. Bloomin' Brands was downgraded to Underperform from Market Perform, as he noted that his 2020 earnings estimates for the company are nearly 10% below consensus.
CHIPOTLE SAYS BMO ANALYSIS 'NOT ACCURATE': Chipotle spokesperson Stefani Green told The Fly that BMO Capital Markets’ analysis is "not accurate." "The cost of our pork represents less than 2% of Chipotle’s total food costs. Since we purchase higher quality, more expensive pork than commodity pork, and we have pricing agreements in place, we don’t expect a significant impact on our costs," Green stated in a comment issue to The Fly.
HORMEL COULD BE PRESSURED AFTER EARNINGS: Meanwhile, Hormel Foods on Thursday reported second quarter adjusted earnings per share of 46c on revenue of $2.34B, compared to the 45c and $2.37B analysts were expecting. The company lowered its outlook for fiscal 2019, and now sees EPS of $1.71-$1.85 and revenue of $9.5B-$10B, lower than its previous view of $1.77-$1.91 and $9.7B-$10.2B, respectively. Analysts currently expect the company to report EPS of $1.80 and revenue of $9.7B for the fiscal year. The company's revised FY19 earnings guidance range is based on the input cost increases experienced in Q2 and a forecast for volatile domestic pork prices in the second half of FY19, the company said in a statement.
On its earnings conference call, Hormel said African swine fever is the "biggest unknown" in the meat industry, adding that prices for most pork products will increase late in the third quarter.
Stephens analyst Ben Bienvenu said in a post-earnings note to investors that comparing guidance to consensus is complicated by the fact that some analysts were accounting for the sale of Cytosport in their estimates, while others did not. While he kept an Equal Weight rating on Hormel shares and is reviewing his estimates, the analyst said that management's mention of African swine fever uncertainty could pressure the shares today.
PRICE ACTION: In morning trading, shares of Chipotle are down about 6% to $664.12. Bloomin' Brands is lower by almost 8%, Texas Roadhouse is down about 6% and Hormel is down 2.4%.
Chipotle
-41.02 (-5.81%)
Bloomin' Brands
-1.46 (-7.23%)
Texas Roadhouse
-2.96 (-5.38%)
Hormel Foods
-1.1 (-2.79%)