Recovery Still Possible for Chipotle

Based on everything we know, we don't expect the latest incidents to have as pronounced an impact as those in 2015, as management has a much better handle on the issue's cause and solution and our analysis suggests a more muted consumer response.

This doesn't mean Chipotle's issues are resolved. As we've previously stated, Chipotle will continually find itself validating its food safety practices going forward, which we expect will require additional costs beyond new food safety training and procedures. We also think Chipotle will continue to look more like a traditional quick-service restaurant, or QSR, chain, relying on traditional marketing and new product introductions to drive traffic.

Still, while some customers are unlikely to return to Chipotle at the same frequency as prior to 2015 and we don't expect unit economics to return to historical levels until the out years of our DCF model, we still think Chipotle can be a top-tier QSR chain. Our confidence stems from several positive developments in the works, including the probable national launch of queso in 2018 (backed by a national advertising campaign), mobile ordering, better utilization of its second assembly line, and minimal resistance to recent pricing increases (reinforcing our narrow moat rating).

We plan to trim our near-term top-line growth and margin assumptions, which will reduce our $450 fair value estimate by roughly 5%. While investors must be willing to accept some quarter-to-quarter volatility, we see a potential opportunity for longer-term investors.

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