Chipotle Warns of High Costs, Shares Slide

Chipotle falls after signaling continued high costs to win back consumers

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Shares of Chipotle Mexican Grill (CMG) fell Tuesday after the restaurant chain “clarified” its second quarter outlook, appearing to confirm that costs related to food, marketing, and promotion will remain elevated as it seeks to regain consumer trust following its 2015 food scares.

CHIPOTLE WARNS ON COSTS

In a regulatory filing after Monday’s close, Chipotle “clarified” its financial outlook in connection with an investor meeting, saying that “for Q2, we continue to expect food costs to be approximately 34.2% of sales, and marketing and promotion costs to be up approximately 20-30 basis points versus Q1 to 3.6%-3.7% of sales. As a result, we expect other operating costs as a percentage of sales for Q2 to be at or slightly higher than reported for Q1. For the full year, we continue to expect comparable restaurant sales increases in the high single digits.”

PIPER MAKES ONLY MINOR TWEAKS:

Piper Jaffray’s Nicole Regan highlighted that the news follows a “solid” Q1 report and says the Q2 guidance update necessitates only “relatively minor” tweaks to her quarterly models. The analyst maintains her earnings predictions for both 2017 and 2018, adding that the firm’s latest checks generally reflect the consensus opinion that trends are now “headed in the right direction,” likely helped by Chipotle’s TV campaign. Regan reiterated an Overweight rating and $530 target on the stock while noting that its next catalyst is “stringing together a series of steady quarterly improvements.”

MAXIM PREFERS DEEPER PULLBACK

While keeping a Hold rating and $440 target on Chipotle, Maxim’s Stephen Anderson cut his Q2 profit estimate to $2.62 from $2.87 per share on the company’s likely higher costs, adding that he had previously expected food expenses to improve as promotional activity and commodity prices eased. The analyst models double-digit comparable sales growth for the quarter while warning of impacts from the Easter holiday shift and Chipotle’s recently-disclosed data breach, saying he still prefers to wait for a “deeper pullback” before recommending the stock.

DEUTSCHE HIGHLIGHTS MARGIN CONCERNS

Writing that margin recovery “remains under pressure,” Deutsche Bank analyst Brett Levy says food, marketing, and other operating costs continue to form an “apparent drag on restaurant-level profits.” Levy lowered his second quarter EPS view by 20c to $2.04 and highlighted that management indicated sequential expense pressures are expected to persist and could near 100 basis points of additional costs versus the prior consensus forecast for restaurant-level margins. The analyst keeps a Sell rating on the shares, arguing that Chipotle “faces an uphill battle” to regain lost sales while lifting margins

PRICE ACTION: Shares of Chipotle remain down 6.7% to $428.31 in late day trading.

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Solar Stocks that Could be Taken Over

Goldman sees Vivint as top target when M&A heats up in solar space

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As the potential for increased mergers and acquisitions in the U.S. solar space ramps up, Goldman Sachs analyst Brian Lee views Vivint Solar (VSLR) as a main target for possible deals citing restructuring potential in the residential solar business.

M&A RIPENING

Lee said the transaction pipeline in the U.S. solar sector appears to be picking up, a trend he views as likely to continue, and estimated that approximately $3B of announced solar deals could be on track to close in the second half of 2017.

The emergence of contracted cash-flow based models, the restructuring of business models, low-cost financing and declines in solar equity prices are increasing the likelihood of mergers and acquisitions, the analyst wrote.

RANK 1:

Based on the potential for increased M&A, Lee upgraded Vivint to Buy from Neutral and raised his price target for the shares to $6 from $3.50. Lee assigned Vivint Goldman’s highest M&A rank of 1, representing a 30% to 50% probability of a deal, up from 3, as he sees increased restructuring potential in the residential solar business.

He added the company’s renewed financing breadth, concentrated equity ownership and aggressive shift to cash/loan volumes strengthens its turn-around potential and position as an M&A target.

Lee said management has previously said it is open to a sale and Goldman’s hypothetical sensitivity analysis suggests potential mid-teens returns for an acquirer if mix shift continues.

OTHER RANK INCREASES

Lee also assigned a rank of 1 to 8point3 Energy (CAFD), up from 4, saying while the firm has not viewed the company as an attractive acquisition candidate due to high leverage and its dual-parent ownership structure, an announcement by First Solar (FSLR) and SunPower (SPWR) to explore strategic alternatives could result in a sale of the company. He added risk-reward for potential buyers is attractive at current equity prices.

Lee kept a Buy rating on the name and raised his price target to $16 to $15.

In addition, he notes Sunrun (RUN) is trading below tangible book value following underperformance but Goldman’s hypothetical sensitivity analysis suggests potential returns above 15% for an acquirer if mix shift persists. Lee ranks the company at a 2, up from a 3, reiterates a Buy rating and raises his price target to $10 from $9.

PRICE ACTION

In Tuesday trading, Vivint rose 19% to $5.18, 8point3 Energy increased 9% to $13.82, and Sunrun rose 8.3% to $6.34.

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Tesla nears China Manufacturing

The agreement with the city of Shanghai would allow Tesla to build facilities in its Lingang development zone

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Tesla Inc. (TSLA) said it is close to an agreement to produce vehicles in China for the first time.

The agreement with the city of Shanghai would allow Tesla to build facilities in its Lingang development zone. Tesla would need to set up a joint venture with at least one local partner under existing rules and it isn’t immediately clear who that would be.

Setting up local production is key for Tesla to continue growing in China, where Tesla’s revenue tripled to more than $1 billion last year.

Assembling vehicles locally would allow the company to avoid a 25 percent tax that renders Model S sedans and Model X sport utility vehicles more expensive than in the U.S.

Bringing down the costs of electric cars is crucial to Tesla’s ambitions to reach more mass market consumers. Next month, Tesla is slated to begin rolling out the Model 3, a more affordable and smaller electric sedan. Tesla has yet to launch the Model 3 in China.

In the U.S., consumers stood in long lines to place $1,000 deposits for the vehicle. Tesla sold 80,000 cars in 2016 and aims to boost it by about 7-fold to 500,000 annually by 2018.

In March, Tencent Holdings Ltd., China’s biggest internet company, bought a 5 percent stake in Tesla for $1.8 billion. Teaming up with Tencent could help the automaker gain traction in a market where more than 200 companies have announced plans to build new-energy vehicles.

Tesla purchased its only vehicle assembly plant in Fremont, California, from Toyota Motor Corp. in 2010 for just $42 million. The company has estimated the cost of its battery gigafactory near Reno, Nevada, may eventually reach about $5 billion. The company said it plans to build another 4-5 gigafactories in the next few years.

Shares of Tesla (TSLA) are trading at an all time high pre-market trading. Shares have gained 73% year-to-date in 2017.

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Parexel Sold for $5 billion

PAREXEL sold for $88.10 per share in cash for $5B, including PAREXEL’s net debt

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PAREXEL International Corporation (PRXL) and Pamplona Capital Management announced that they have entered into a definitive agreement under which Pamplona will acquire all of the outstanding shares of PAREXEL for $88.10 per share in cash in a transaction valued at approximately $5B, including PAREXEL’s net debt.

PAREXEL International Corporation provides clinical research and logistics, medical communications, consulting, commercialization, and advanced technology products and services for pharmaceutical, biotechnology, and medical device industries worldwide.

The purchase price represents a 27.9% premium to PAREXEL’s unaffected closing stock price on May 5, 2017, the last trading day prior to published market speculation regarding a potential transaction involving the Company; a 38.5% premium to the unaffected 30-day volume weighted average closing share price of PAREXEL’s common stock ended May 5, 2017; and a 23.3% premium to the Company’s undisturbed 52-week high.

“Today’s announcement is the culmination of a comprehensive review of the opportunities available to the Company, including interest solicited and received from multiple parties with the assistance of independent financial and legal advisors. Having considered these opportunities, the PAREXEL Board of Directors unanimously determined that this all-cash transaction and the significant, certain value it provides is in the best interest of PAREXEL shareholders, as well as our company,” said Josef von Rickenbach, Chairman and CEO of PAREXEL.

Bank of America Merrill Lynch (BAC) and J.P. Morgan Chase Bank, N.A. (JPM) have provided committed financing for the transaction. The transaction is expected to close early in the fourth quarter of 2017, subject to the approval of a majority of PAREXEL shareholders and the satisfaction of other customary closing conditions.

PAREXEL expects to hold a Special Meeting of Shareholders to consider and vote on the proposed agreement with Pamplona as soon as practicable after the mailing of the proxy statement to shareholders.

The PAREXEL Board of Directors unanimously approved the transaction and intends to recommend that all PAREXEL shareholders vote to approve the agreement with Pamplona.

Upon the completion of the transaction, PAREXEL will become a privately held company and shares of PAREXEL’s common stock will no longer be listed on any public market.

Goldman Sachs & Co. LLC  (GS) is acting as financial advisor to PAREXEL, and Goodwin Procter LLP is serving as legal counsel. Perella Weinberg Partners LP is acting as financial advisor to Pamplona, and Kirkland & Ellis LLP is serving as legal counsel.

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Boeing Raises Forecast for Aircraft Demand

Boeing projects need for 41,030 new aircraft over 20 years, valued at $6.2T

The single-aisle segment will see the most growth over the forecast

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Boeing  (BA) has raised its forecast for new airplane demand, projecting the need for 41,030 new airplanes over the next 20 years valued at $6.1T.

The company’s annual Current Market Outlook, or CMO, was released today at the Paris Air Show, with total airplane demand rising 3.6 percent over last year’s forecast.

“Passenger traffic has been very strong so far this year, and we expect to see it grow 4.7 percent each year over the next two decades,” said Randy Tinseth, vice president of Marketing, Boeing Commercial Airplanes.

“The market is especially hungry for single-aisle airplanes as more people start traveling by air.”

The single-aisle segment will see the most growth over the forecast, fueled by low-cost carriers and emerging markets. 29,530 new airplanes will be needed in this segment, an increase of almost 5 percent over last year.

The forecast for the widebody segment includes 9,130 airplanes, with a large wave of potential replacement demand beginning early in the next decade.

With more airlines shifting to small and medium/large widebody airplanes like the 787 and 777X, the primary demand for very large airplanes going forward will be in the cargo market.

Boeing projects the need for 920 new production widebody freighters over the forecast period.

The Asia market, including China, will continue to lead the way in total airplane deliveries over the next two decades. Worldwide, 57 percent of the new deliveries will be for airline growth, while 43 percent will be for replacement of older airplanes with new, more fuel efficient jets.

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