Chipotle's Reputation Risk Has Grown Too High To Support Valuation, Wells Fargo Downgrades

Chipotle Mexican Grill, Inc. (NYSE: CMG)'s reputation and ongoing initiatives to improve its brand image may take a hit following more reports that several customers reported symptoms of norovirus after eating at their stores.

This event is reason enough for Wells Fargo's Jeff Farmer to downgrade Chipotle's stock from Outperform to Market Perform with a price target lowered from $470 to $375 as it comes barely a year after the E. coli food scare.

As such, Chipotle could face heightened traffic headwinds over the next few weeks, the analyst suggested. Meanwhile, the media is likely to continue reporting on the event for at least the next few days even though the store in question has been fully sanitized and re-opened. But at the end of the day, this does mark Chipotle's fourth food scare incident in less than two years.

'Diminished' Recovery Prospect

Chipotle's recovery story is based on continued same-store sales recovery, but the recent norovirus event implies the casual fast food restaurant chain now has a "diminished" same-store sales recovery prospect, the analyst added. This will also weigh on the company's average unit volume recovery, which is just as vital to drive a longer-term margin and EBITDA recovery and support a premium valuation on the stock.

Based on the company's statement, the norovirus doesn't come from its food supply, which may imply the virus was spread from a sick employee.

"Assuming this is what happened, there are still plenty of questions as to why that employee was handling food or near customers," the analyst concluded.

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