Analyst warns that Chipotle's stock could tumble 10% before things get better again
According to Andrew Strelzik at BMO Capital Markets, the impact on traffic will be short-lived, but during that time the stock will most likely plummet.
"We originally believed that the media coverage of E. coli and related consumer perception issues created risk only to 4Q15 assuming an eight-week timeline of recovery that is similar to what Taco Bell experienced during its E. coli outbreak in 2006 and what we believe CMG realized around the September salmonella outbreak in Minnesota," wrote Strelzik in a note to clients Monday.
Based on previous breakouts of foodborne illness, the timeline for a total recovery of the business is 8 weeks. The problem being, that timeline restarts with every new report of an illness.
"However, the incremental occurrences create risk to 1Q16 that we did not previously expect and increase the probability that CMG realizes a traffic decline in 4Q15 as each new announcement of E. coli cases linked to CMG likely 'resets the clock' of the eight-week timeline given the potential for reigniting media coverage," wrote Strelzik.
The good news, according to the report, is that the new cases reported on Friday are part of the original outbreak, which occurred mostly in late October, and not an entirely separate case. So with Chipotle's response, there will hopefully be no new reports, thus not restarting Strelzik's window.
The bad news, however, is that during that two-month recovery period, Strelzik expects Chipotle's stock to take a serious hit.
"Significant near-term uncertainties remain, including the risk of additional E. coli cases linked to CMG, the number of stores at which same-store sales may be affected, and the potential timeline of a same store sales recovery," said the note. "Recognizing the uncertainties, however, we derive 10% downside to CMG's stock to $475 in a low-case scenario."
To be clear, Strelzik has a price target of $730 on the stock. CMG closed at $564 on Monday.
Strelzik's estimation comes off an assumption that first quarter same store sales will lag by 0.4%-0.5%, while same store sales for 2016 will only drop 0.1%-0.2%. This is also based off of the sales for Chipotle's Minnesota stores during its salmonella outbreak earlier this year.
Strelzik said his positive "long-term outlook is unchanged," but in the mean time the stock could experience some volatility.
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