With Food Safety Concerns Reemerging, BMO Downgrades Chipotle

Despite testing queso, the Chipotle Mexican Grill, Inc. CMG potential norovirus outbreak led BMO Capital Markets analyst Andrew Strelzik to downgrade the stock to Market Perform. Strelzik set a price target of $350.

“While norovirus at a single location is not overly significant on the surface," Strelzik said, "we believe there is greater uncertainty now as there is a reasonable probability that media coverage will outweigh the severity of the incident and create renewed same-store sales weakness, expanding downside risk within our framework."

3 Reasons Behind The Downgrade

• Food safety concerns are reemerging. It was reported on Tuesday that at least 13 customers were feeling sick after eating at Chipotle's Sterling, Virginia location.
• While norovirus at one location isn't extremely significant, this outbreak could negatively impact Chipotle customers’ psyche. Strelzik expects them to “likely remained fragile and we believe there is a reasonable probability that media coverage of the new illnesses will outweigh the actual severity of the incident and create renewed samestore sales weakness.”
• Chipotle might be no longer able to use pricing as a near-term lever due to comps weakness.

Which Stocks Could Benefit?

“Our previous survey work suggested that CMG’s traffic losses accrued to grocery (42% of respondents indicated greater frequency eating at home), other Mexican restaurants (47%), and to a lesser extent to other restaurants (11%),” Strelzik said.

With that being said, he sees Darden Restaurants, Inc. DRI, McDonald's Corporation MCD, and Panera Bread Co PNRA as stocks that could benefit from a traffic decline at Chipotle.

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