Chipotle downgraded, Cheesecake Factory upgraded at Wedbush

Wedbush's recent note gave ratings on several stocks in the food industry, including Cava (CAVA), Chipotle (CMG), and The Cheesecake Factory (CAKE). Cava was upgraded to "outperform" from "neutral" and the stock's price target was raised to $48 from $35. Chipotle was downgraded to "neutral" from "outperform," but its price target was raised to $2,400 from $2,200. The Cheesecake Factory was upgraded to "outperform" from "neutral" and received a raised price target to $40 from $34. Wedbush Securities Managing Director Nick Setyan joins Yahoo Finance to discuss Chipotle and The Cheesecake Factory's ratings.

"If you think about fast, casual Chipotle ... Wendy's (WEN), McDonald's (MCD), et cetera, they're a direct grocery competitor because they're ... a direct meal replacement, as opposed to like a full service restaurant, which is more of a social, group occasion," Setyan explains. "On the margin, grocery becomes more competitive. On the margin again, there's gonna be some share shift."

"The difference between, say a Cheesecake Factory, which is a full service, and ... Chipotle, is that expectations are actually really low going into 2024 because casual dining's been such a laggard for so long," Setyan says. All The Cheesecake Factory "needs to do is perform in line with expectations given where valuations are."

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

Video Transcript

JULIE HYMAN: When you talk about aspirational trade-up, I think Chipotle. And that's one of the stocks that you downgraded to neutral as part of this outlook for next year. Is that why that you think that they are going to suffer as a result, perhaps of people trading down a little bit?

NICK SETYAN: And I think that's part of it. Yeah, absolutely. So you know, again, I mean, if you think about fast casual Chipotle, if you think about QSR, you know, Wendy's, McDonald's, et cetera, they're a direct grocery competitor, because they're-- at the end of day, they're direct meal replacement, as opposed to like a full service restaurant, which is more of a social group occasion.

And so, you know, on the margin, grocery becomes more competitive. On the margin, again, there's going to be some share shift. And relative to full service, the average check growth, the price increases we've seen over the last few years within fast casual and QSR are about 10 percentage points higher than full service. So that average check gap between the two has come down as well.

So I think there's going to be a little bit share shift there as well. That and specifically for Chipotle, the carne asada ends at the end of Q1. And we'll see what they have up their sleeves beyond that. But currently, that's what's driving transactions. That's what's driving the comp upside potential in Q4. And that ends, then the Q1, at the same time, they're going to have to take big price increases in California. 14% of their sales are in California. Units are in California. A higher percentage of sales in California. So to me, that's two whammies at the same time.

JOSH LIPTON: And, Nick, I'll get you out of here on this. Cheesecake Factory, that's another name you're now bullish on. You go to a outperform rating on that one, too. It sounds like at least part of your argument there, Nick, is really a margin story?

NICK SETYAN: Well, the difference between, say, a Cheesecake Factory, which is a full service, and like a Chipotle is that expectations are actually really low going into 2024, because casual dining has been such a laggard for so long. And what we're saying is all Cheesecake needs to do is perform in line with expectations, given where valuations are for Cheesecake Factory.

So 7 times EBITDA for a company that is accelerating unit growth to 6%, 7% in 2024, has outperformed on transactions relative to the category, has a few smaller brands that are growing very rapidly, like North Italia and Flower Child that have consistently had very solid positive transaction trends, very, very attractive cash on cash returns. And so all Cheesecake, at this point, has to do is just meet expectations and the stock will go up in the context of small caps that hopefully continue to outperform and regain some of that discount that they've had for the last couple of years as interest rates have been rising.

And so in an interest-- in a lower interest rate environment, we also think some of these smaller caps are going to outperform. Our top pick, at least on the small-cap value side, is Cheesecake.

JULIE HYMAN: We'll keep watching all of these names going into next year. Thank you so much really appreciate it, Nick. Nick Sutyan, thanks for your time.