Once a company gets in a dominant position in the casual dining arena, it’s extremely hard to dislodge it when the concept becomes hip. The more people like and frequent the restaurants, the more they tell their friends and associates. Such was the case with Chipotle Mexican Grill Inc. (NYSE: CMG). The unique menu was considered fresh and healthy to some degree. Combined with quick service and a cool atmosphere, it was huge with consumers. Then an E. coli nightmare set in and the stock has taken a beating, and many former loyal customers may decide to seek alternatives.
A new Jefferies report highlights some outstanding restaurant stocks to buy for 2016, many of which have very unique menus and strong concepts. We found three that are not only poised for a potential solid year, but could have the kind of cuisine that could attract a former Chipotle customer. But first, a look at Chipotle itself.
Chipotle had continued to astound shareholders and short sellers alike until the recent headline issues. It has more than 1,500 restaurants worldwide and is planning on opening up to 195 new restaurants this year.
By now most investors are familiar with the E. coli outbreak that has severely affected the company. Analyst across Wall Street have acknowledged that the outbreak has had a larger impact on sales than expected, and the stock plunged late last year when the company rescinded its 2016 forecast and projecting its first quarterly same-store sales decline as a public company. It also noted that while the outbreak has expanded to several new states, no new infections have occurred since early November.
In November, Chipotle announced plans for a $300 million stock buyback and unveiled revamped food-safety procedures, which include improving its supply chain and conducting DNA testing of produce. While some feel that, with the outbreak contained, an improvement to the food safety and a strong brand with consumers, traffic could turn positive in the third quarter of 2016. Yet, investors should note Wall Street as a whole remains very negative and any future outbreaks could be very bad for the company.
The Thomson/First Call consensus analyst price target is $571.38. Chipotle shares closed Monday at $448.81
Here are the three stocks rated Buy at Jefferies that could possibly benefit from the Chipotle’s troubles.