I’ve covered Chipotle (CMG, Financial) for a while now. First, in December 2015, anticipating the fall below $400 and then in August 2016 calling it a buy before its bounce back. That was before the company-wide problems really started to be felt on the books.
So I stopped by a Chipotle on a random Tuesday night (last night actually) at a time when in prior years the store would have been packed. This time, though, it was pretty much like every other fast casual restaurant. McDonald's, which still does an excellent job with its marketing, was far busier at the same time just a block down.
I tend to shy away from restaurants and retail in the public markets, and what I’m seeing now with Chipotle is an erosion of brand. The company could justify its super high price-earnings multiple when it had a raving fan base.
I’m not sure that’s the case anymore. If the market does have a bad correction in the next few years, this stock could be in the $100s.
Yum! Brands (YUM, Financial), owners of Taco Bell, Pizza Hut and Kentucky Fried Chicken, trades at 25 times forward earnings. McDonald's, the king of fast food, trades at 24 times forward earnings. Restaurant Brands (QSR, Financial), owner of Burger King, Tim Hortons and Popeye's, looks downright cheap at 19 times forward earnings. More importantly, each of those companies have a consistently predictable sales and earnings trend that management can be relatively sure of barring any blindside hits.
Chipotle, on the other hand, does not, and adding melted cheese in the form of its newly introduced queso isn’t going to cure that. The company was once seen as the healthy alternative to fast food, but those days are over as it enters into recovery mode. The problem for investors is that unlike McDonald's in the early 2000s, with the Atkins diet crushing its stock, Chipotle’s valuation is still too high.
When you’re looking to invest your own money or other people’s money, you have to be ruthless in analysis, but you have to be practical as well. The past does not predict the future and Chipotle can pull itself out of the hole. It won’t, however, get back those raving fans it once had. Growth will never be like it once was when over a 10-year period sales advanced over 500%, earnings by 1,200% and the stock price to 800%.
The time has past for paying 50 times earnings for this stock. Last night, I didn’t eat at Chipotle; I had Cava which is 100 yards from Chipotle and was no doubt inspired by the Mexican fast casual’s innovative approach to serving customers. Cava is a Greek-inspired Chipotle taking over the mid-Atlantic and Northeast and it’s not the only Chipotle clone, which is why Chipotle at this level is still not a buy.
Of course, don’t tell that to Bill Ackman (Trades, Portfolio), Frank Sands (Trades, Portfolio) or Jim Simons (Trades, Portfolio), who all have pretty sizable positions in the stock. Ackman has close to 20% of his firm’s assets in CMG. Massive mistake if what I’m seeing comes into fruition.
Disclosure: I have no position in any stock mentioned in this article.
