Canaccord analyst Lynne Collier is playing it neutral when it comes to Chipotle Mexican Grill, Inc. (NYSE:CMG) and McDonald’s Corporation (NYSE:MCD) after the food chains posted earnings to very different reactions across the Street. Whereas Chipotle merits a price target reduction after sharply underperforming expectations, McDonald’s fared much better in its third quarter showcase, especially thanks to strong comps.
Let’s explore why Collier is sticking to the sidelines for both of these consumer goods stocks in the aftermath of third quarter results:
Chipotle Is a Far-Off Comeback Kid
Chipotle just cannot seem to shake the ghost of E. coli past from two years prior, and it certainly did not ease investor fears over the summer when a Virginia customer’s sickness spooked the Street all over again. In what has been a rocky trek to redemption, the burrito chain’s third quarter performance exposes that the company still has a long way to go- not even a queso dip launch could be a saving grace.
On back of an earnings underclass posted yesterday evening, shares are crashing almost 15% in the wake of Chipotle’s disappointing third quarter results, marking the stock’s lowest point since 2012. Collier points out that unit development has stalled, and in a “noisy quarter,” the top-line continues to be “sluggish.”
In reaction, the analyst surveys from the sidelines with rising apprehension, maintaining a Hold rating on CMG stock while chopping the price target from $400 to $325, which implies a close to 18% increase from where the stock is currently trading. (To watch Collier’s track record, click here)
For 2018, the analyst has cut her EPS forecast from $10.94 (that was once more bullish than FacetSet consensus of $10.22) to $8.60.
There have been some improving quarter-to-date trends, with comps trending better by 2 to 3%, but with a “somewhat confusing” outlook as the CMG team suggests the run-rate will likely continue as is through the fourth quarter.
On a positive note, the debut of queso juiced up a “much needed lift to comps,” writes Collier and there the CMG team is trying to garner some buzz with “new potential menu items on the horizon” from frozen margaritas to salad greens to a revamped beverage program. Moreover, the burrito chain intends to kick up the price by 5% throughout 900 restaurants spanning predominantly Texas and Midwest markets on back of a price boost earlier in the year. Even a mobile app update will soon be underway, as Collier highlights, “New mobile app will expand features: CMG plans to update its app on November 6th, featuring new capabilities that will enhance the guest experience and improve speed of service. Examples include rapid reorder, a digital offer platform and mobile payment.”
In a nutshell, Chipotle’s “sales remain well below pre-incident levels nearly two years later despite unprecedented levels of marketing and other initiatives (i.e. queso introduction),” Collier writes with unease, concluding: “We continue on the sidelines given our belief that a sales recovery will take longer than many investors expect as we maintain that competitive intrusion is the most significant L-T issue for CMG.”
Word on the Street echoes Collier’s tone of caution, with TipRanks analytics indicating CMG as a Hold. Out of 28 analysts polled by TipRanks in the last 3 months, 6 are bullish on Chipotle stock, 18 remain sidelined, while 4 are bearish on the stock. With a return potential of nearly 23%, the stock’s consensus target price stands at $341.17.
There’s a Lot to Like About McDonald’s
McDonald’s benefited from good comps this quarter, showcasing stellar top-line results in its third quarter print released after the bell tolled yesterday evening.
While Collier does not budge away from the sidelines, she acknowledges the world’s largest restaurant chain’s quarterly performance was “impressive,” producing “another solid quarter given market share across all major geographies.”
Waiting until shares hit a better price to entice a shift to the bulls, the analyst reiterates a Hold rating on MCD stock with a price target of $170, which represents a 3% increase from current levels.
For the third quarter, McDonald’s comps trounced both the Street as well as the analyst’s projections, with a +6.0% global comp surpassing the analyst’s forecast of +5.1% and the Street’s +4.5%. This marks McDonald’s ninth straight quarterly win of positive comps and the company’s third back-to-back quarter showcasing positive traffic. MCD saw a 9% year-over-year surge on a constant currencies basis to $1.76, mirroring the Street but a notch away from the analyst’s estimate of $1.78. Foreign exchange proved to be advantageous this quarter by $0.02. GAAP EPS reached $2.32, taking under wing a roughly $850 million gain on back of the sale of the company’s China and Hong Kong segments.
One revamped initiative that carries a great deal of earnings power potential for the company is McCafe. “In September, MCD reintroduced McCafe, which incorporates a more modern look to the brand and more choices including the reintroduction of the McCafe espresso line following an equipment upgrade,” Collier underscores, wagering: “We think this category can be a strong growth driver for MCD over the next several years.”
In an earnings breakdown, the analyst contends, “In the U.S., comps rose +4.1% (above the Street of +3.4%), with numerous drivers still to fully play out such as delivery, ‘experience of the future’ and new menu news. On the year, MCD left its outlook essentially unchanged, with only minor tweaks to U.S. commodity inflation, SG&A and the tax rate. However, mgt. indicated that they expected some choppiness in performance over the next few quarters due to investments in growth initiatives, lapping depreciation benefits from China and re-franchising. While we believe there is much to like about MCD, we continue to wait for a better entry point as shares are trading at 15.6x NTM EBITDA, which is roughly two standard deviations above its historical average.”
Looking ahead, the analyst stands by her EPS expectations, expecting McDonald’s to hit $6.55 for the year and $7.10 for next year.
Wall Street is more bullish than Collier on this consumer goods player, considering TipRanks analytics reveal MCD as a Buy. Based on 22 analysts polled by TipRanks in the last 3 months, 16 rate a Buy on McDonald’s stock while 6 maintain a Hold. The 12-month average price target stands at $174.53, marking a 6% upside from where the stock is currently trading.