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Chipotle shares bounce after a few more on Wall Street try to call a bottom

Key Points
  • Stephens raises its rating for Chipotle to equal weight from underweight, saying the current valuation is becoming more sensible after its drop this year.
  • Chipotle would be "one of the largest beneficiaries" of a corporate tax rate cut, the analyst says.
  • Piper Jaffray also reiterates its overweight rating for the restaurant chain, citing potential innovations from new kitchen upgrades.
A employee sprinkles cheese on a burrito at a Chipotle Mexican Grill restaurant in Hollywood, California.
Patrick T. Fallon | Bloomberg | Getty Images

A bottom may be near for Chipotle shares, according some Wall Street firms.

Stephens raised its rating for shares of the burrito restaurant chain to equal weight from underweight, saying the current valuation is becoming more sensible after dropping this year. The stock is down 21.3 percent this year through Wednesday compared with the S&P 500's 9.2 percent gain.

"With the stock reflecting increasing investor concern around the ability of sales and margins to rebound after the recent norovirus and Dallas rodent incident, we believe expectations are now low enough to begin taking a fresh look at shares of Chipotle," analyst Will Slabaugh wrote in a note to clients Thursday. "We also view current valuation as reasonable."

Slabaugh lowered his price target for Chipotle shares to $325 from $350. The new target is 9.4 percent higher than Wednesday's closing price.

Chipotle shares rose 2.8 percent in Thursday afternoon trading.

Slabaugh said a corporate tax rate cut would help Chipotle's earnings, assuming President Donald Trump and the Republican Congress can get one passed. The restaurant has a tax rate of 38.4 percent.

"Chipotle carries one of the industry's highest tax rates," he wrote. "Should Washington surprise us with action around tax reform, Chipotle would be one of the largest beneficiaries in the group."

Slabaugh noted that if the corporate tax rate were lowered to 20 percent, the restaurant chain's earnings per share would increase 29 percent.

Another Wall Street analyst is even more bullish on Chipotle.

"We recently visited Chipotle's new test kitchen (branded as the Chipotle NEXT Kitchen)," Piper Jaffray's Nicole Miller Regan wrote in a note to clients Wednesday.

"Although we recognize the company is still in the early stages, the progress thus far suggests to us that a broader cross-functional shift is occurring in terms of menu/marketing innovation, digital/technology and operations."

Regan reiterated her overweight rating for Chipotle shares and her $510 price target.

— CNBC's contributed to this story.