Sunday, October 27, 2013

Chipotle Climbs 2% as Morgan Stanley Sees More Traffic, Higher Prices

Chiptole Mexican Grill (CMG) has gained nearly 41% this year, double the S&P 500′s 20.5% return. It trades at 32 times forward earnings, again, more than twice the S&P 500′s 15. And Morgan Stanley says now is time to start feeling optimistic about the Mexican food purveyor.


Morgan Stanley’s John Glass and Jack Bartlett explain why:

Most recently, our AlphaWise consumer survey shows CMG has best in class value scores, a strong indicator of future traffic gains. This also provides headroom for pricing, which we still believe is 5% lower than peers on core items. Pricing will likely be increased early in '14. Finally, we see the debate shifting on CMG as it increasingly articulates its vision of developing additional concepts (ShopHouse may just be the beginning), significantly expanding the total addressable market and supporting the multiple…While valuation is not the most compelling selling point now, historically owning best-in-class growth has rewarded LT shareholders.

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As a result they upgraded Chipotle to Overweight from Neutral,  increased their earnings estimates for 2014 and 2015, and raised their price target to $485.

At the same time they downgraded Panera Bread (PNRA) to Equal Weight from Overweight on concerns that consumers believe it’s expensive. They write:

In downgrading PNRA, we acknowledge that while the brand scores exceptionally high on a number of key brand attributes, value is a key shortcoming and may limit SSS growth moving forward. This, combined with recent weaker traffic trends YTD, slower catering growth and planned 2H13 investment spending, compels us to lower our investment rating one notch…

3 in 10 of consumers cite high prices as the reason for poor perceived value, we think impacting frequency. Consumers also say PNRA has increased prices faster than other brands.

Chipotle has gained 2.1% to $427.90, the second best performer in the S&P 500, while Panera has dropped 2.8% to $159.47, and underperforming Jack in the Box (JACK), which has dipped 0.3% to $39.98, Krispy Kreme (KKD), which has fallen 2% to $19.43, and Starbucks (SBUX), which is off 0.5% at $76.98.

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