The last few quarters have been a big challenge for Chipotle Mexican Grill (CMG, Financial), and few analysts would have expected that the stock would decline to nearly $400 per share after an all-time high of $758 per share. The E. coli outbreak had a big impact on the stock, and the recent norovirus scare added to the stock's misery.
There is no doubt that Chipotle Mexican Grill has done exceedingly well in controlling the spread of the illness; it speaks positively about the company’s management. However, the stock price movement is a different issue.
For fourth quarter 2015, the company’s revenue declined by 6.8% to $997.5 million, and the company’s comparable restaurant sales declined by 14.6%. For the full year, revenue increased by 9.6% to $4.5 billion, and comparable restaurant sales were higher by 0.2%.
The company’s fourth quarter of 2015 was severely impacted by the E. coli outbreak; the impact of the incident on future comparable restaurant sales remains to be seen. While the company has provided a target of 220 to 235 new restaurant openings for 2016, it has not provided any guidance on comparable store sales.
However, according to analyst estimates, Chipotle Mexican Grill is likely to report EPS of $9.19 for 2016 and EPS of $15.06 for 2017. Considering 2016 and 2017 EPS at Thursday's market price of $502.25, the stock is trading at forward PE of 55 and 34 for fiscal year 2016 and fiscal year 2017. Clearly, the valuations seem expensive, and I would not be surprised if the stock corrects further from current levels.
It remains to be seen how comparable sales trend for 2016, but I am not too optimistic in the foreseeable future. Even if comparable restaurant sales are flat for fiscal year 2016, the stock is expensive at current levels. Therefore, purely from a valuation perspective, I would wait for further correction before considering any exposure to the stock.
Chipotle Mexican Grill has leveraged on brand image of a healthy menu, and that is one of the key setbacks in the near term. Over the long term, the company has to work on building consumer confidence, and it was announced in January that the company has introduced new safety procedures and taken extra steps to ensure that ingredients are safe.
A complete review of the supply chain has been done to ensure quality products reach the end consumer along with initiatives such as DNA-based testing of fresh produce and meats to identify harmful bacteria in these ingredients. The management is committed to food safety and complete consumer satisfaction, but the near-term concern is likely to continue.
Chipotle Mexican Grill is fighting hard to ensure that the best product reaches the end consumer and the company can regain its lost comparable restaurant sales momentum. However, renewed growth is unlikely in the foreseeable future, and PE-based valuation points to the stock still being expensive. I would wait for one or two quarters for a clear trend before considering exposure to the stock. Any potential correction (another 15% to 20% from current levels) in the next three to six months will make the stock interesting.
Disclosure: No positions in the stock.
