Morgan Stanley has grown more cautious on fast-casual name Chipotle after its data showed waning foot traffic. The firm downgraded shares from overweight to equal weight and cut its price target to $1,664 from $1,847 in a Tuesday note. That represents about 9% upside from where shares currently trade. “In the near to medium term though, we think it will be harder for the stock to out perform, as we think the concerns about traffic and pricing have merit and will be harder to disprove for several quarters with some further price sensitivity possible, and our topline estimates are below consensus reflecting this,” wrote analyst Brian Harbour in a note. “Softness spreading to higher end customers and the food delivery channel could be a challenge across fast casual, and might be for CMG as well.” Traffic slump In the future, Morgan Stanley will look to be more constructive on the name but sees it as more balanced today. The firm sees Chipotle underperforming industry metrics on traffic in the fourth quarter of 2022, weakness which could spread into 2023 before getting better. This is generally a headwind for the high multiple stock, Harbour said. “We have lowered ’23 traffic estimates here though 4Q22 may be the low point given the brisket LTO lap,” he said. “We also assume mix runs negative for most of ’23 with the shift back to dine in and potential softness in delivery or premium items/add-ons.” Morgan Stanley’s survey also had mixed results about Chipotle’s value. “Customer affinity is still high, but value perception isn’t off the charts,” Harbour wrote. “We think CMG remains well-positioned, but it doesn’t necessarily have an edge on value.” Chipotle ranked behind other chains such as Starbucks, Wingstop, Shake Shack and even Domino’s Pizza when asked about value now versus a year ago, according to the bank. On the plus side, the survey also showed that customers intend to return to Chipotle in the next six months. Pricing promos Chipotle may have some room to use promotional pricing in 2023 given their solid margins, but Morgan Stanley isn’t sure they should take the opportunity. “There are likely a range of viable options via the loyalty program to help drive traffic, but these would have to be used judiciously to avoid getting on a treadmill of promotions,” Harbour said. Overall, the bank is still bullish on Chipotle in the long-term, just more cautious in the near-term. “Fundamentally, we still view CMG as one of the best growth assets in the sector and the longer term thesis remains in place,” Harbour said. “The shares performed in line with the group and the market in 2022(-21%)after several years of outperformance, so we don’t think an especially bearish outcome is priced in today.”
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