3 Catalysts Drive JPMorgan's Downgrade Of Chipotle

JPMorgan has downgraded Chipotle Mexican Grill, Inc. CMG to Neutral from Overweight, as the stock has sustained at levels above its $375 price target. Furthermore, the brokerage is bearish on the casual dining sector.

“While we do think it's interesting to see the company be more operationally focused and technologically current, we believe we are capturing much of this improvement in both our current and out year estimates,” analyst John Ivankoe wrote in a note.

Skepticism Remains

The analyst is skeptical whether the improved operations have been or will be met with additional demand in an increasingly competitive restaurant landscape.

However, Ivankoe still believes mid-$300s represents an attractive entry point for Chipotle shares, which closed Friday’s trading at $410.75.

The analyst said Chipotle would need a F20 AUV and restaurant margin of $2.2 million and 23.4 –24.1 percent to achieve 10 percent–15 percent plus upside from current levels.

Ivankoe also noted Chipotle is likely to benefit from corporate tax reform, but such reforms may be significantly delayed.

The Fast-Casual Restaurant Sector

On the sector front, the analyst said the supply is continuing to outpace demand coupled with headwinds from labor and commodities.

Wall Street is mixed on the prospects of Chipotle, with some saying the company is primed for turnaround, while others say there is limited visibility in to sales and margins.

In this scenario, Ivankoe prefers Starbucks Corporation SBUX closer to $55, McDonald's Corporation MCD near $120 and Yum! Brands, Inc. YUM in the low-$60s as lower risk ideas.