Chipotle Mexican Grill, Inc. (CMG): Breakout Coming in 2018?

Chipotle Mexican Grill, Inc. (NYSE:CMG) is having a bad year as the company continues to be marred by chronic problems caused by virus outbreaks at its outlets, dwindling margins due to promotions and declining foot traffic. The stock is down over 19% year-to-date. Earlier this month, investment firm Cowen said that Chipotle shares will continue to underperform because the Mexican chain’s quality perception is still very low among the consumers. Cowen’s analyst Andrew Charles said in the report that Chipotle Mexican Grill, Inc. (NYSE:CMG) will have to do a lot more than add new food items to its menu to regain its lost glory. The analyst said that Chipotle’s latest food item, Queso, will not be enough to drive sales. He cited Cowen’s research which is mainly based on Facebook check-ins of consumers at Chipotle outlets.

However, several contrarian analysts think that Chipotle Mexican Grill, Inc. (NYSE:CMG) shares should be bought on the latest weakness. The biggest short term catalyst for Chipotle is the upcoming tax reduction. Chipotle currently pays a whopping 35% of its profits in taxes. In case the government reduces taxes to 20%-25%, Chipotle’s market cap will increase by 15%-30% overnight.

Analysts also think that Chipotle Mexican Grill, Inc. (NYSE:CMG) could easily offset its losses in the US by growing internationally. Most of the fast food chains remain profitable outside the US. Chipotle’s store count in the US is growing at a rate of 10%. The company’s FCF remains strong despite of the ongoing problems. Chipotle’s cash and short term investments cover all the liabilities and debt. Therefore, Chipotle should start targeting emerging markets like Asia for international expansion. Analysts also think that Chipotle should acquire small food chains. Recently, several reports recommended Chipotle to acquire fresh salad company Sweetgreen, which is getting a lot of fame because of its quality and taste.

Last month, investment banking firm Maxim Group lowered its short term EPS target for Chipotle Mexican Grill, Inc. (NYSE:CMG) amid store closures due to Hurricanes in the country. But the firm is bullish on the stock and thinks that a recovery is coming in 2018. Maxim Group’s report said that technology-based sales of Chipotle will account for 12% of total sales by 2017, amid an increasing focus of the company on its app and digital promotions. In the most recent quarter, Chipotle’s online sales increased by 52% year over year. Maxim Group also maintains its comp sales estimate of 8.9% for full fiscal 2017. The firm also likes catering (off-premise) business potential of Chipotle Mexican Grill, Inc. (NYSE:CMG).

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