Shares of Chipotle Mexican Grill (CMG) are sliding after Oppenheimer analyst Brian Bittner downgraded the stock to Underperform, a sell-equivalent rating. The analyst argued that the shares "high-flying" valuation has "priced in" an earnings path that Bittner believes is "too optimistic," even when assuming healthy sales.

SELL CHIPOTLE: In a research note to investors this morning, Oppenheimer's Bittner downgraded Chipotle to Underperform from Perform, with a $400 price target, as his analysis now supports downside to the 18-month risk/reward. The analyst pointed out that Chipotle's "high-flying" valuation has "priced in" persistent mid-single same-store sales and a path to at least $20 of earnings per share versus $8-$9 this year. His work suggests this earnings path is "too optimistic," even when assuming healthy sales. Further, Bittner argued that an auto-boost to the 5%-plus same-store sales trends investors require from new marketing, digital and product strategies appears aggressive when applying all the moving factors. Overall, the analyst told investors that he can only support $20 of EPS by underwriting high-single-digit same-store sales through 2020, which he views as unlikely. The Street's margin expansion assumptions could be difficult to achieve without meaningful sales upside owing to labor headwinds, potential store-level investments and lack of menu-pricing upside, he contended.

10 UPGRADES SINCE FEBRUARY: Oppenheimer's Bittner also highlighted in his research note that since the company's new CEO announcement in February, Chipotle is up 82% and has been upgraded 10 different times by his Wall Street peers. Moreover, despite its 13% decline since late August, Chipotle has been upgraded three times since July 30th. On August 15, Morgan Stanley analyst John Glass upgraded the stock to Overweight from Equal Weight, citing what he views as increasing evidence that makes his bull case scenario more believable. Specifically, Glass highlighted accelerating top line growth, driven by a quickened pace of new product introductions, greater opportunities in store margins, and a "more benign" competitive environment. The analyst also raised his price target on the shares to $600 from $413. Two weeks before, his peer at Jefferies had upgraded Chipotle to Buy from Hold, while raising his price target on the stock to $550 from $400. Analyst Andy Barish told investors in a research note of his own at the time that he believes Chipotle is one of the better-positioned companies to benefit from the ongoing shift to digital/off-premise. The company's operations are now poised to again handle increased volume and throughput, the analyst contended. Further, he argued that new management's plans are "credible" and should help drive results in 2019 and beyond.

WHAT'S NOTABLE: Chipotle has announced it is piloting the company's highly anticipated new loyalty program, Chipotle Rewards. As the latest innovation in Chipotle's ongoing efforts to drive digital innovation and make the brand more accessible, the points-based loyalty system is now live in three test markets, namely Phoenix, Kansas City, and Columbus, Ohio. Eligible customers in each of the three test markets can sign-up for Chipotle Rewards via the Chipotle app or on Chipotle.com. Those who enroll can earn 10 points for every $1 spent, with 1,250 points resulting in a free entree. To drive even more digital orders, customers can earn 15 points for every $1 spent in the app and online for a limited time. Customers in pilot markets can also earn free chips and guac after their first purchase using Chipotle Rewards.

PRICE ACTION: In morning trading, shares of Chipotle have dropped about 0.5% to $452.07.