Chipotle’s A Winner Amid FDA Scrutinty On Animal Antibiotics

With the Food & Drug Administration (FDA) getting more serious about curbing the use of antibiotics in animal feed, the new rule can impact restaurant chains in different ways. If this rule is a harbinger of things to come, restaurants like Chipotle Mexican Grill (NYSE:CMG), which boasts of natural ingredients in its food is bound to benefit as an improved image in the eyes of the customers could be the ultimate pay off. Chipotle competes mostly with quick service and casual dining restaurants such as Chili’s, McDonald’s (NYSE:MCD), Burger King, Yum! Brands (NYSE:YUM) and Papa John’s, among others.

We have a $417 price estimate for Chipotle, which is about 2% above the current market price.

See our complete analysis for CMG stock here

The Current Proposal

The new FDA rule will require farmers to obtain prescriptions from a veterinarian if they need to use antibiotics in animal feed to prevent diseases. The FDA hopes the move will curb the rampant use of antibiotics. As per the FDA estimates, farm animals consumed a whopping 29.1 million pounds of antibiotics in 2010, up from 28.7 million pounds in the previous year. ^[1]

Antibiotics are used in animal feed to help livestock, pigs and chickens become more resistant to diseases as well as help them gain weight. However, there are concerns that the residue of antibiotics is getting into the milk or the meat of cattle, and this poses risk to public health. ^[2]

What it Means for Chipotle?

Although the FDA’s current proposal will not alter the current supply chain of most major restaurant chains substantially, it certainly provides guidance as to where things are headed in the future. Moreover, if the issue gets significant coverage and consumers are educated about the current practices, this could work in favor of Chipotle since it has been serving naturally raised meat for more than a decade. Demand for food considered natural and organic is increasing and consumers are ready to pay a slight premium for it.

In December 2011, Chipotle CEO Mr. Steve Ells visited Capitol calling for an end to the indiscriminate use of antibiotics in American meats.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. FDA Tries to Curb Antibiotics Use on the Farm, wsj.com, April 11, 2012 [↩]
2. Animal Antibiotics: FDA Asks Drug Companies To Limit Overuse Amid Health Concerns, huffingtonpost.com [↩]