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Weekly Wrap: What's Next for Chipotle

The fast-casual chain is moving on after a food safety scare, but we think it could be an up and down year for the firm. Plus, positive reaction for Illumina, and we're bearish on steel.

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Jeremy Glaser: Chipotle makes progress in its recovery, Illumina impresses the market, and we're still bearish on steel. This time on the Morningstar Weekly Wrap.

Chipotle's preliminary results this week show the firm is moving past its food safety scares, but R.J. Hottovy thinks it will still be a tough road.

R.J. Hottovy: There's a lot of investor focus on Chipotle Mexican Grill this week, as the company preannounced fourth-quarter results, including slightly better than expected same-store sales results, particularly in the month of December, but also a worse than expected EPS outlook. We think the implications for shareholders are twofold. First, the company's outlook for 2017, including double-digit same-store sales, looks more palatable after the fourth-quarter update, particularly as the company saw month-to-month sequential improvement. However, it is getting more costly to drive traffic to restaurants. Right now, the company says that promotional and marketing expenses are running north of 4%. That's well above historical norms, the 2-2.5% range, and will probably linger, at least to north of 3%, for some time.

We think the bottom line is that while Chipotle's top-line results are showing signs of recovery, we think that shareholders have to be aware that the business model and the economics behind it are changing, and that it is getting more costly to drive traffic to restaurants. While the company, I think, will start to stabilize after 2017, I'm thinking it's going to look much more like a normal restaurant concept that relies heavily on promotions and other marketing tactics to drive consumers to their restaurants. I think shares are about fairly valued, and I think that shareholders have to be prepared for what could be another up and down year for the company.

Glaser: Illumina shares soared this week, after the firm, among other things, launched a new genome sequencer. Michael Waterhouse sees the announcement as a good sign for the firm's moat, but he doesn't see a big change in the growth trajectory.

Michael Waterhouse: Illumina stock reacted positively this week to a number of developments from the company, the biggest being the announcement of a new high throughput sequencing genome instrument called the NovaSeq. The NovaSeq has a number of advancements that should help maintain the firm's dominant market share in the high throughput sequencing market and help uphold the firm's narrow economic moat. However, we don't anticipate to dramatically change our growth outlook for the firm, largely because the NovaSeq will replace the older high-seq instrument line. Additionally, this instrument does not directly address the company's challenges in the lower throughput clinical diagnostics market, therefore we will be leaving for fair value unchanged and think shares are modestly overvalued at current levels.

Glaser: Morningstar recently updated our steel forecast, and although we boosted the near-term prices, we still think they are going to be lower in the long term.

Andrew Lane: We've raised our near-term steel price forecasts on the basis of cost support from higher steelmaking raw material prices. However, the impact on our steelmaker fair values is rather modest, as higher prices will also be accompanied by higher input costs. The key takeaway here is that even though we've raised our near-term price forecasts, every single steelmaker under our coverage is trading well above our fair value estimate, and in some cases, the gap is rather wide. Additionally, all of our steel companies are no-moat companies, given that we see no evidence of sustainable competitive advantages.

With regard to our long-term steel price forecasts, we're a lot more bearish than consensus for two reasons. First of all, we think structural overcapacity will remain in place in China, and secondly, we think Chinese fixed-asset investment will disappoint relative to consensus expectations.

Glaser: In case you missed it, on Morningstar.com this week, Russ Kinnel gave his list of 17 funds for the new year.

Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.