Lukewarm queso reviews, a difficult sales environment and aggressive Wall Street expectations may not be a recipe for success for Chipotle Mexican Grill, Inc. (NYSE: CMG). On Tuesday, Bank of America downgraded Chipotle stock from “neutral” to “underperform,” and analyst Gregory Francfort says the company will have a difficult time meeting consensus earnings expectations over the next two years.
Chipotle has been focusing on improving labor efficiency to help boost profitability as it tries to recover from a series of food safety outbreaks that started in late 2015. Labor minutes per entrée, a measure of labor efficiency, was 7.3 minutes in 2016, up from 6.9 minutes in 2014. Bank of America estimates Chipotle management dropped that number to only 6.7 minutes in 2017. Unfortunately, Francfort says there is now little room for the company to improve its efficiency further, and labor cost as a percentage of sales will likely stay at or above 27 percent unless foot traffic meaningfully accelerates.
“While we believe the company has done a solid job of maintaining costs, particularly around labor, this likely limits further upside to margins,” Francfort says.
According to Francfort, consensus earnings per share estimates for CMG stock in 2018 and 2019 are at least 10 percent too high. Bank of America is modeling 2018 earnings per share of $9.50. Even assuming a generous price-to-earnings ratio of 30, Bank of America’s price target of $285 per share is significantly lower than Chipotle’s current price above $320.
“The company continues to trade at an expensive level on aggressive street earnings consensus, and therefore we see risk to the stock going forward,” Francfort says.
Despite Bank of America’s skepticism, not all Wall Street analysts are bearish on Chipotle stock. In September, Mizuho analyst Jeremy Scott said Chipotle’s polarizing new queso has served an important purpose, even if its reviews have been mixed.
“We view a shift in consumer and media focus toward product and away from earlier food safety events as a positive,” Scott says.
Mizuho has…
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