MORGAN STANLEY: 5 ways Bill Ackman could stir things up at Chipotle

Pershing Square announced on Tuesday that it bought a 9.9% stake in Chipotle, and is seeking talks with the company.

In a regulatory filing sometimes used to signal an activist-investor stance, the hedge fund led by Bill Ackman said it thought the company's shares were undervalued.

Ackman, who has staged activist campaigns in various companies ranging from Herbalife to JC Penney, clearly wants to stir things up at the fast-food chain.

Chipotle said it welcomed the investment.

In April, Chipotle reported its first quarterly loss, as customers remained apprehensive of the restaurant after E. coli and norovirus outbreaks were linked to it.

In a note on Wednesday, Morgan Stanley equity analyst John Glass and his team wrote about five changes Pershing Square, and Bill Ackman, could make at the company.

Here they are:

• He could expand the board and make sure that compensation is better in line with performance.
• The hedge fund could hire people in marketing, cost control, and IT that have a different skill set and would improve on the work of the current management team.
• Pershing could bring a focus on margins. The analysts wrote that Chipotle has been slow to adapt its cost structure to the reality of lower average unit volumes, or sales per restaurant unit.
• Chipotle could "fill or kill" new concepts. In July, the company announced it is launching a burger chain called Tasty Made in Ohio this fall.
• Ackman may limit new unit expansion, Glass wrote.

"We see no quick fix to what CMG really needs, a revitalization of top line, and activism's traditional tools for restaurants - spin offs, re-franchising, asset sales and cost cuts - don't appear to offer short term opportunities, leaving few obvious quick levers to pull," Glass wrote.

"But the presence of a large and vocal investor may provide management more incentive to hasten their turnaround efforts, which appear to have stalled,and could cause the shorts to cover,at least for now."

The analysts maintained their "Equal Weight" rating on the stock, with a price target of $405 per share.

Chipotle shares were up 5% to $414.05 in pre-market trading, extending a rally that started after news of Pershing Square's stake crossed on Tuesday.