- Brendan McDermid/Reuters; Joe Raedle/Getty Images; Bob Bryan/Business Insider
It has been less than 24 hours since hedge fund manager Bill Ackman and his Pershing Square fund announced a 9.9% ownership stake in the fast-casual chain Chipotle.
Ackman’s stake and subsequent filing indicate that the investor plans to try to shake up the burrito chain as he has done with previous investments such as JC Penney (which did not end well) and Canadian Pacific Railroad (which has gone better).
Even in the short time since the disclosure of Pershing Square’s stake, Wall Street analysts have not been kind to Ackman’s new investment. In notes to clients in reaction to the news, opinions have ranged from lukewarm to outright dismissal.
It is not as if Chipotle has been in a perfect position recently. It has struggled with a nagging food-illness issue and sales have plummeted. Despite the struggles, the analysts still don’t seem to be encouraged by the investment thesis.
We’ve got a selection of Wall Street’s reactions to the investment. Check them out:
Stifel: “We cannot fathom Pershing’s operational or mathematical investment thesis.”
“We emphatically reiterate our sell rating on [Chipotle] shares following the news that Pershing Square has started a 9.9% activist position,” Stifel analysts wrote in a note. “We cannot fathom Pershing’s operational or mathematical investment thesis.”
To be fair, Stifel has been bearish on Chipotle for some time, downgrading the firm to sell in July with a $215 per share target price. (It currently sits at $434 a share.) The firm, however, simply believes that the red-hot profit growth of Chipotle cannot be sustained.
“Mathematically, we continue to assert that to justify CMG’s current $414/sh valuation, some combination of the following two irrational assumptions must be made: (1) that the economic laws of diminishing returns (market-maturation curves for Restaurants) do not apply to the Chipotle Mexican Grill brand; and/or (2) that the mathematical laws of Discounted-Cash-Flow do not apply to CMG, the stock.”
Morgan Stanley: “We see no quick fix to what CMG really needs.”
While Morgan Stanley analysts were slightly kinder, as Business Insider’s Akin Oyedele noted, they were not particularly enthused by Pershing’s prospects.
“We see no quick fix to what CMG really needs, a revitalization of top line, and activism’s traditional tools for restaurants – spin offs, re-franchising, asset sales and cost cuts – don’t appear to offer short term opportunities, leaving few obvious quick levers to pull,” the Morgan Stanley analysts wrote, though they did note that a big-name investor could hasten some needed changes.
Oppenheimer: “We don’t see any viable paths to financially engineer shareholder value from the boardroom.”
Oppenheimer analysts said they believe that the long-term brand image and sales recovery is needed for Chipotle, and there is likely not much that Ackman can do to hasten it.
“We believe CMG’s poor risk/reward remains problematic for shareholders,” the note said. “Pershing Square revealed a 9.9% ownership, but unlike other activist situations, we don’t see any viable paths to financially engineer shareholder value from the boardroom.”
The analysts say that the fair value for the stock going forward is roughly $300 a share – well below its current level.
“We believe stock is only ‘under-valued’ if our earnings analysis is completely inaccurate and EPS power reaches $20 per share, from less than $5 per share in ’16E (unlikely, in our view),” Oppenheimer wrote.
Barclays: “We don’t expect a traditional restaurant activist playbook.”
Jeffrey Bernstein at Barclays said that Pershing Square is unlikely to use the traditional method of “fixing” struggling restaurant brands.
“We are not surprised to see an ‘activist’ in CMG. With that said, we don’t expect a traditional restaurant activist playbook (i.e. refranchising, cost cutting, balance sheet leverage, return of cash, etc),” Bernstein said. “Instead, we expect the focus to be on returning the brand to former industry leadership using past proven growth strategies.”
Bernstein did say, however, that management has tried to undertake a wide swath of strategies to fix declining sales, but so far it has been “challenging and frustrating” to rebuild brand image.
Baird: “We are unclear if Pershing Square can add value.”
Baird’s analysts agree that Chipotle needs a brand makeover and are also skeptical that Ackman can do much to help that turnaround.
“Said differently, we believe Pershing’s proposals will need to help CMG to drive a recovery in sales in order to be successful in adding near- and longer-term value to shareholders, and we are unclear if Pershing will be able to add substantial value in this respect,” the note said.
The analysts did note that the investment should inspire some confidence in the near term, limiting Chipotle’s stock downside. In the long term, however, the activist stake may not be able to drive much upside.
Credit Suisse: “A fresh perspective would be well received by investors.”
Jason West at Credit Suisse is a bit more bullish on the new eye that Ackman and Pershing could give to Chipotle.
“We would expect Pershing’s focus to center on fundamental changes to accelerate what has been a sluggish sales recovery following a string of food safety events,” West wrote. “Our conversations suggest that most investors generally disapprove of management’s emphasis on aggressive menu discounting to recover lost traffic (rather than restoring brand trust) and believe that a fresh perspective would be well received by shareholders.”
West, however, did note that this is outside the typical activist’s purview.
“The typical activist ‘playbook’ in restaurants has called for a combination of refranchising, cost-cutting and leverage,” the note said. “However, in our view, these options are less appealing in CMG’s case given a high current valuation, lack of franchising historically, and since CMG would be selling stores that are significantly diminished relative to historic peak volumes and profits.”
Buckingham Research Group: “It’s unlikely that any activist effort can accelerate the process of regaining consumer trust.”
John Zolidis at Buckingham Research Group noted that Ackman could push for some options such as leverage, getting rid of additional concept stores, and even a sale back to McDonald’s.
These, however, would not fix the largest issue facing the Chipotle.
“It’s easy to make up strategies to unlock value at CMG. However, what is really required is the return of the customer following the food safety issues from the last year,” Zolidis wrote.
“It’s unlikely that any activist effort can accelerate the process of regaining consumer trust but we imagine the company is open to additional ideas on this front.”