As Market Loses Appetite, Chipotle Shares Get More Interesting

While the market finds itself scrutinizing

First, we view management's claim that comps would have been 100 to 200 basis points higher--excluding unfavorable weather--and the decision to stop serving carnitas in roughly a third of restaurants after discovering one of its pork suppliers did not meet its "Food with Integrity" standards credible. In our view, Chipotle's commitment to naturally-raised proteins is a key source behind its pricing power, and by extension, our narrow moat rating. Although the decision to pull carnitas from its menus will impact near-term sales, we believe it will preserve its brand intangible asset moat source. Second, even after factoring extraneous issues, comparable traffic trends came in around 4%, outpacing much of the industry, and suggesting pricing power strength. Finally, we find Chipotle ahead of the curve with respect to many of the factors driving consumer restaurant purchase decisions, with online ordering/payments, catering, and delivery all poised to offer top-line upside as the year progresses.

There is no change to our $650 fair value, as a modest reduction in full-year comps (now in the high single digits versus earlier estimates in the low double digits) will be offset by a reduction in food and stock-based compensation expenses (we're now forecasting full-year restaurant margins around 28% and operating margins just north of 18%). Although shares still trade slightly above our fair value, we believe concerns about near-term comps could create buying opportunities for a narrow moat-rated, uniquely positioned name in fast-casual.

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