As my followers know, over the last few months, I have been extremely bearish on Chipotle Mexican Grill (CMG, Financial). In fact, I had been expecting the stock to fall to $400 ever since the E.coli breakout. Surprisingly, it has taken Chipotle Mexican Grill a lot more time than I expected to hit my $400 price target.
However, upon analyzing the stock again, I think Chipotle Mexican Grill is still not a buy. Although I did say back then that investors should consider buying Chipotle Mexican Grill when it hits $400, I can now see the stock heading lower in the coming months. Thus, I would suggest long-term investors wait for a better entry point to buy the stock.
While it is impossible to exactly call Chipotle Mexican Grill’s bottom, I think investors should start accumulating its shares when it falls another 10% and keep accumulating further on any dips. It will likely take Chipotle Mexican Grill more time to recover from the fiasco than I, and everyone else, expected. As a result, I will not be surprised if shares of the company lose another 10% of their value.
Still overvalued
Chipotle Mexican Grill, despite the drop, is trading at a higher earnings multiple than before the incident. This is because it has been spending tons of cash on discounts and advertising in order to repair its damaged brand image.
As a result, Chipotle Mexican Grill’s trailing P/E stands at over 39. Clearly, the company’s earnings have taken a bigger hit than the share price and its P/E was a little under 33 when it was trading around $750.
Thus, I believe Chipotle Mexican Grill’s current value still doesn’t price in the actual damage done by the E.coli breakout, which is why I think investors should stay away from the stock.
Conclusion
Despite the massive brand image concerns, Chipotle Mexican Grill is trading at the valuation of a growth stock. However, with the company’s comps dropping 30% from year-ago levels, there is very little chance of it sustaining this valuation in the near future.
The company’s efforts to repair its brand image haven’t been as successful as everyone was expecting, and it will probably have to throw more money at the problem to curb the falling sales in the near future. Given the concerns, I think Chipotle Mexican Grill still has about 10% downside potential.
Disclosure: The author doesn’t have any position in the stock mentioned in the article.
