Chipotle Mexican Grill Inc. (CMG, Financial) just released earnings after the closing bell on Wall Street and the numbers were better than expected. The stock is up over $10 in after-hours trading thanks to an earnings beat; however, revenue was soft and comps were 8.1% lower than expected. After 16 years, I have seen companies release numbers like this only to pull back to the closing price and actually open down the next day.
If you have owned Chipotle stock for the last decade, you feel pretty good with 300% returns. That’s still five times better than the S&P 500. In 2012, the stock suffered a brief hiccup, dropping to a low of $250 from $440, and has since hit highs north of $750. Now that Chipotle is suffering from a new hiccup, the street has reacted negatively toward the stock because of recent norovirus outbreaks in Virginia.
CFRA Research analyst Tuna Amobi chopped Chipotle to hold from buy with a $350 price target, slashed from $540, cut his 2017 EPS estimate to $8 from $8.46 and lowered his 2018 EPS outlook to $11.68 from $11.93. Credit Suisse's Jason West cut his target to $325 from $425, stating negative headlines "may delay price increases. We now assume no additional menu pricing in 2018," and adding these challenges could force Chipotle to open fewer restaurants.
Short-term pressure on sales and margins is likely to pass if Chipotle can solve its current challenges and get back to doing what it does best, making delicious fast-casual Mexican food. It is markedly different, but reminds me of when McDonald’s (MCD, Financial) hit $13 back in the early 2000s because of the Atkins craze. The norovirus outbreak is serious, but with raving fans comes a lot of media attention, which turns sour when something goes viral.
The stock is off 40% year to date and it is time to be greedy, especially if you are a long-term, buy-and-hold investor. Truthfully, I have not eaten at Chipotle in a couple of years, but always had great food when I did.
Looking back over the decade, the company has consistently grown stronger. Sales are up fourfold and, aside from this current misstep, EPS was up sevenfold to $15.10 per share. A number I think investors will see again sooner rather than later. Chipotle has 2,200 stores generating $1.9 million in sales each (on average) with plenty of room to grow worldwide. It opened 240 restaurants in 2016 and plans to open 200 to 210 this year. To be fair, that alone should put a lot of investor minds at ease. Opening stores means there is still demand for the product. The company will need to spend money to get customers back in the door, especially in markets where same-stores sales slipped big, but free burritos always do it for me, Chipotle (if you’re reading).
Say the company can open just 200 stores a year for the next decade and get back to its previous 26% gross margins and double-digit net profit margin. If we go ultra-conservative and say these stores will be flat on sales from now until then, 4,200 stores producing $2 million on the top line and $225,000 to $250,000 on the bottom line, investors are looking at north of $1 billion in earnings. The market cap right now is under $10 billion. Even with an industry average price multiple, Chipotle could be worth $25 billion by then.
Two gurus, Bill Ackman (Trades, Portfolio) and Ruane Cunniff (Trades, Portfolio), have been losing their shirts in the stock. Ackman has over a fifth of his assets under management in it. Cunniff has 2% of his. Neither has liquidated, but Ackman added right under $400 per share in his last filing.
Disclosure: I do not own CMG, but may purchase in the next 72 hours.
