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Chipotle downgraded because of rising pork price due to African swine fever

Key Points
  • BMO downgraded Chipotle to underperform from market perform, citing its high exposure to the virus-related animal protein.
  • "It has the greatest pork exposure in our coverage (estimated at 10%), and our work suggests that CMG realizes commodity inflation with little to no lag," BMO analyst Andrew Strelzik said.
  • BMO also slashed its 12-month price target for Chipotle to $620 from $675, which would represent a 12% decline
  • A spokesperson at Chipotle told CNBC that pork represents less than 2% of the restaurant chain's total food costs.
Chipotle Mexican Grill Inc. restaurant in Peoria, Illinois.
Daniel Acker | Bloomberg | Getty Images

Chipotle Mexican Grill could be about to take a hit from rising prices due to the African swine fever, at least according to BMO Capital Markets.

The bank downgraded the restaurant chain to underperform from market perform on Thursday, citing its high exposure to pork. BMO also slashed its 12-month price target for Chipotle to $620 from $675, which would represent a 12% decline based on Wednesday's close of $702.

Shares of Chipotle fell about 5.6% on Thursday.

"It has the greatest pork exposure in our coverage (estimated at 10%), and our work suggests that CMG realizes commodity inflation with little to no lag," BMO analyst Andrew Strelzik said in a note on Thursday. "This suggests that CMG could be among the earliest to realize the impacts of African Swine Fever, potentially as early as 3Q19."

However, a spokesperson at Chipotle told CNBC that pork represents less than 2% of the restaurant chain's total food costs.

"Since we purchase higher quality, more expensive pork than commodity pork, and we have pricing agreements in place, we don't expect a significant impact on our costs," the spokesperson said.

Chipotle has had quite a comeback this year with its stock up more than 60% year to date on the company's double-digit profit growth and expansion plans. Now the viral outbreak poses a threat for the restaurant to sustain its momentum as animal protein prices keep climbing amid the fever fears, according to BMO.

"African Swine Fever likely will create a meaningful, multi-year upswing in protein prices and the potential magnitude and duration of impact across the restaurant industry is underestimated, in our view," Strelzik said. "This adds another layer of downside risk to our cautious casual dining view as company-owned models are most at risk."

BMO said casual dining chain Bloomin' Brands and Texas Roadhouse are also at risk because of their high exposure to pork and other protein products.