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Long-Term Investors: Don't Write Off Chipotle

The embattled firm is in for a rough 2016, but longer-horizon investors may be rewarded for their patience with the narrow-moat name, writes Morningstar's R.J. Hottovy.

With the market anticipating ugly results from

Based on the precipitous drop in comps to start the year and negative publicity around the criminal investigation, we plan to adjust our full-year comp outlook calling for a 7% decline--already below market expectations of a 5% decrease--to the low-double-digit range. Even with significant one-time expenses, break-even EPS implies midteen restaurant margins in the first quarter (versus 27.5% a year ago) and the low 20s for the full year (suggesting full-year EPS around $9). In the longer term, management anticipates roughly 200 basis points of ongoing food-safety costs, meaning that mid-20s restaurant margins are a more realistic medium-term target than our prior estimates in the high 20s. We plan to cut our $575 fair value estimate by a little less than 10% to reflect these costs, but still find shares undervalued at current levels.

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About the Author

RJ Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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