The bull case for Chipotle: 3 weeks and chorizo

Chipotle missed earnings, revenue and same-store sales estimates in its second-quarter earnings report, a trifecta of terribleness that shows just how sorely the company has been bruised by the continuing fallout of its E. coli outbreak.

But don't tell that to stock investors: Chipotle shares (CMG) were up 5.4 percent Friday.

While most analysts saw little to cheer in the report, there were two small things for the bulls to hang their hats on: slightly less awful results for July, and chorizo.

As Chipotle released its quarterly results after Thursday's bell, management slipped in a bit of extraneous positive news amid a report that showed same-store sales sliding 23.6 percent compared with the second quarter of 2016.

"We are pleased to see that July sales comp trends have already improved to 200 to 300 basis points," Chairman and co-CEO Steve Ells said.

This appeared to be taken positively by the Street; Piper Jaffray analyst Nicole Miller Regan wrote in a research report that "we are encouraged to hear that same-store sales thus far in July have improved to (21%)."

"We see leverage as a discussion of when (not if) trends improve," said Regan, who has an overweight rating on the stock.

Yet a 21 percent decline in same-store sales recorded over the first few days of the month makes for an odd bull case. Indeed, Guggenheim analyst Matthew DiFrisco pointed out that "This pace is well behind the 3Q15 consensus estimate of (13.3%)."

More than one analyst is confused by the strong rally in a stock that reported numbers far below market expectations.

"We are surprised by the size of the move today," Barclays analyst Jeffrey Bernstein said Friday on CNBC's " Power Lunch ." "I think investors are just buying into the idea that there's just about any sign of sales improvement."

"I think the important thing is the delta," Telsey analyst Bob Derrington said in a Friday phone interview, referring to change over time. "We have seen sequential improvement," though at the pace of "baby steps."

In addition, the stock has another problem: its valuation. Despite Chipotle's widely publicized problems, the stock continues to trade at a multiple to many of its competitors.

Derrington cut his price target on the stock to $400 from $420 following the results.

Beyond the mild improvement on a quarter-to-quarter basis, any optimism around the company has primarily been driven its new Chiptopia rewards program, which is intended to increase the frequency of visits by Chipotle's most loyal customers. Yet something else also crops up among Chipotle bulls: sausage. The company has begun to offer chorizo in its restaurants, with a full rollout expected by the end of 2016.

While ground and spiced meat may not be the intuitive place for a company beset by health concerns to pivot, Regan writes that she expected sales to rise as "chorizo becomes available across the system over the course of the year."

The company is certainly making a big deal of it, mentioning the Spanish sausage several times on its earnings call. Chipotle managers appears to see it as a way to put the health concerns behind them; director of brand marketing Mark Shambura said Thursday that "we're adding new news with chorizo."

Chorizo-based optimism, plus slightly improved sales numbers over the last few weeks, appear to be the sausage from which Friday's Chipotle bounce was made.

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