Shares of Chipotle Mexican Grill (CMG) are on the rise after Bill Ackman's Pershing Square reported a 9.9% stake in the company and said it intends to engage in discussions with the burrito restaurant chain. However, research firms Oppenheimer and Baird do not believe any activist-driven proposals will be able to solve the company's problems. Stifel analyst Paul Westra goes even further, saying Pershing's position creates an "excellent selling opportunity."
ACKMAN CALLS CHIPOTLE "UNDERVALUED": Pershing Square disclosed in a regulatory filing a 9.9% stake in Chipotle, saying it believes the company's common stock is "undervalued" and is an attractive investment. Additionally, Bill Ackman's fund said it intends to engage in talks with Chipotle and its management and board.
ACTIVIST NOT ABLE TO FIX PROBLEMS: Commenting on the news, Oppenheimer analyst Brian Bittner said he believes Chipotle's valuation suggests more risk than reward. The analyst noted that he does not see any viable paths to "financially engineer shareholder value from the boardroom" and questioned Pershing's suggestion that Chipotle's shares are "undervalued," particularly in light of diminishing returns on capital and risks to unit growth. Bittner reiterated a Perform rating on the shares. While acknowledging that Bill Ackman's reported stake in Chipotle may support a more positive investor sentiment on the stock in the short run, Baird analyst David Tarantino also told investors that he does not believe any activist-driven proposals will be able to drive meaningful incremental shareholder value in the absence of a sales recovery. In a note of his own, the analyst said he sees the risk/reward on Chipotle as fairly balanced. Tarantino reiterated a Neutral rating on the stock but raised his price target on the shares to $450 from $435.
SELLING OPPORTUNITY: Stifel analyst Paul Westra "emphatically" reiterated a Sell rating on Chipotle shares following Pershing Square's news. The analyst told investors that he "cannot fathom Pershing's operational or mathematical investment thesis." Further, Westra said he believes that justifying Chipotles' current valuation requires some combination of "two irrational assumptions," namely that the economic laws of diminishing returns do not apply to the Chipotle brand and/or that "the mathematical laws of Discounted-Cash-Flow do not apply" to the stock. He reiterated a $215 price target on the shares.
MCDONALD'S TAKEOVER UNLIKELY: Conversely, Buckingham analyst John Zolidis remains bullish on Chipotle, reiterating a Buy rating and $547 price target on the shares. In a research note to investors this morning, the analyst also noted that he has been asked "more than once" if Chipotle could be acquired by McDonald's (MCD). While he believes the burrito restaurant chain would provide McDonald's with "a growth vehicle," Zolidis sees little chance of such a deal occurring.
PRICE ACTION: In morning trading, shares of Chipotle have gained about 6% to $439.28.
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