Chipotle's Trajectory Is Both Realistic And Improving, More Buybacks Likely

Shares of Chipotle Mexican Grill, Inc. CMG might finally be recovering from a long case of food poisoning, according to analysts at Wedbush.

The casual dining chain’s earnings report on Thursday was grim in many respects: fourth-quarter earnings in 2016 were $16 million, a number that stood at $67.9 million a year prior. Fourth-quarter revenue came in at $1.03 billion.

But there were positive indicators for Chipotle, such as an EPS of $0.55 that was in line with an expected range of $0.50–$0.58, Wedbush analysts Nick Setyan and Colin Radke said in a Friday report. The analysts maintain a Neutral rating on the stock with a $400 price target.

Chipotle’s valuation “appropriately reflects an improving top-line trajectory, as well as a realistic trajectory for margin improvement,” the Wedbush report said.

Recovery in 2018?

Setyan and Radke lowered EPS estimates for 2017 from $9.04 to $7.91 to reflect pressures on the company’s margins — which include higher marketing spending and increased avocado prices — but said that dynamic could shift in 2018.

“We believe a pivot by management to focus on margins at current sales run rates is poised to benefit 2018,” the Wedbush report said.

Chipotle’s guidance for the year ahead indicated the Denver-based chain will focus on simplifying and improving operations, creative marketing to rebuild its brand and further rollout of digital sales efforts.

The company, which bought back $67 million in stock in the fourth quarter of 2016, is likely to continue with buybacks, the analysts said.

Chipotle is scheduled to report its 2017 first-quarter earnings in late April.

Reputation, Finances Damaged By E. Coli, Norovirus Outbreaks

An E. coli outbreak that began in Oregon and Washington in October 2015 was linked to Chipotle locations in multiple states, sickening 55 people and hospitalizing 21, according to the Centers for Disease Control. Five more infections from a different, rarer bacteria strain were reported in December 2015 in Kansas, North Dakota and Oklahoma.

The E. coli outbreak ended February 1, 2016, according to the CDC.

In the fall of 2015, 234 people contracted norovirus at a Chipotle location in Simi Valley, California, according to Bloomberg, and 64 people were sickened by salmonella from tomatoes served at Chipotle locations in Minnesota. In November of that year, more than 140 Boston College students contracted norovirus from a Chipotle location, according to Bloomberg.