Bad Press Will Keep Chipotle’s Prices Down, For Now

Another Norovirus outbreak couldn’t dent Chipotle’s confidence in itself as the QSR chain looks to raise prices to keep up with rising costs. But it sure took a chunk out of the restaurant’s stock prices.

Stocks were down almost 13 percent last week after a Sterling, Virginia, restaurant triggered a Norovirus outbreak and mice at a Dallas restaurant made headlines, according to news from Reuters. Last Monday (July 24), Chipotle shares dipped to $336.65, their lowest intraday level since April 2013, before leveling out around $340. Stocks have been down 26 percent over the past three months as a result of other recent incidents.

On top of that, two men who got sick from eating at the Sterling location have filed a $74,000 lawsuit against Chipotle. NBC Washington reported that around 135 patrons were affected by the outbreak, which the company believes to have been caused by a sick employee.

But according to Reuters, that’s not even the biggest problem Chipotle is facing. Growth fund managers, including the Fidelity Blue Chip Growth Fund, the Fidelity Contrafund and the T. Rowe Price Growth Stock fund, have been selling off Chipotle shares, and value funds can’t yet afford to pick them up.

Three hundred and eighty-seven mutual funds hold shares in the QSR chain, but only seven are value funds, focusing on the restaurant’s price and balance sheet above its long-term growth prospects. Growth-oriented funds bank on above-market growth rates and show less concern over a company’s valuation.

Analysts said that Chipotle’s price-to-earnings valuation would have to drop to 30 or less before value fund managers would think about investing. The company currently trades at a ratio of 73.9, so it’ll be a while yet before those value fund managers change their minds.

While Chipotle has yet to revise its price restructuring plans, analysts are saying the company won’t be able to raise prices this year due to the negative press.

“We believe the recent negative headlines may delay price increases. We now assume [there will be] no additional menu pricing in 2018,” wrote Credit Suisse Analyst Jason West, who cut Chipotle’s price target to $325 from $425. West also predicted that the ongoing issues would likely stall plans to open new restaurants.

Nick Setyan, an analyst at Wedbush Securities, also lowered his price target from $390 to $350, citing the unlikelihood of Chipotle being able to raise its prices this year.

CFRA Research Analyst Tuna Amobi, after chopping his 12-month price target by more than a third, reduced it by $190 to $350 per share.

“We infer major setbacks to (Chipotle’s) ongoing recovery efforts after (2015) health-related concerns on virus outbreaks at several locations that precipitated a steep and protracted downturn in customer traffic,” wrote Amobi.

Part of the problem is that Chipotle never really bounced back from its bout of bad luck at the end of 2015. Before, the chain’s stock was hovering just shy of $750. But after that year’s outbreaks of E. coli, Salmonella and Norovirus were traced back to Chipotle restaurants, shares could not recover, and these two recent incidents knocked them down even further to around $340. Since those incidents, same-store sales have declined 17.4 percent, as wary customers brought their business elsewhere.

While Chipotle fights the same battle time and again, competitors like Shake Shack and Habit Restaurants are gaining more and more of an edge, Lynne Collier, a Canaccord Genuity analyst, told Reuters. All this at a time when Chipotle is transitioning from a high-growth phase to a more established company, which comes with necessary shifts in spending, advertising and menu offerings.

But there may be a light up ahead. CFRA Research Analyst Todd Rosenbluth said it’s not uncommon for the transition between growth stock and value stock to be a bit fraught, and it’s certainly still possible that Chipotle will one day show up in value portfolios.

It’s just a question of whether consumers get sick of it before then.



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