Chipotle Mexican Grill, Inc. (CMG)  

Ackman Buys into Troubled Burrito Chain Chipotle

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Craig Adeyanju | FlashRatings | Thursday, September 8, 2016 12:34 AM EDT
Bill Ackman’s hedge fund, Pershing Square Capital Management disclosed on Tuesday that it has purchased shares of Chipotle Mexican Grill (CMG). The acquisition gives Ackman’s hedge fund a 9.9% stake in the burrito chain.

While investors seem optimistic about the move, with CMG stock rising as much as 5.7 percent on Wednesday, analysts don’t seem to be particularly impressed about Ackman’s move.

According to the disclosure, Ackman’s hedge fund bought 2,882,463 shares in Chipotle at an average price of $403.75, bringing the value of the purchase to approximately $1.16 billion. Chipotle stock is down by about 39% over the last year following a series of food-safety issues from last year.

The safety issues include an incident of salmonella outbreak in Minnesota, E.coli in 11 states as reported by Chipotle between October and November 2015. There were also outbreaks of norovirus in California and Massachusetts in August 2015 and December 2015 respectively. This came as a huge dent on Chipotle’s reputation as a healthy fast food chain.

Even though the Center for Disease Control and Prevention, or CDC, cleared Chipotle free from E.coli earlier in the year and Chipotle itself have taken steps to regain customers’ trust by bringing in a meat-science professor from Kansas State University, investors have not been happy with the burrito maker.

Following Ackman’s purchase, four analysts issued rating update on Chipotle stock today. They include Stifel Nicolaus, Robert W. Baird, Barclays and Morgan Stanley.

Morgan Stanley’s John Glass notes that, "We see no quick fix to what CMG really needs, a revitalization of top line, and activism's traditional tools for restaurants — spinoffs, refranchising, asset sales and cost cuts — don't appear to offer short-term opportunities, leaving few obvious quick levers to pull.“ Morgan Stanley reiterated its equal weight rating on Chipotle Stock, with a price target of $405.

Analysts at Stifel Nicolaus are not impressed by Ackman’s valuation of CMG, hence, reiterating its sell rating on CMG with a price target of $215.

In general, only five analysts have issued a rating update on Chipotle in the last 30 days, with none of them rating Chipotle a buy.