Chipotle Mexican Grill (CMG, Financial) has been on a terrible run over the last few weeks as the stock has lost considerable value due to the E. coli and norovirus outbreak. The incident has made a dent on Chipotle’s brand image and as a result, the stock has lost almost 40% of its value in the last few weeks.
I recently advised investors to stay away from Chipotle’s stock when it was trading at $560 as I expected the company’s downfall to continue. Chipotle’s shares have since fallen to roughly $400, only to stage an impressive comeback in the last few days. Despite the market-wide selloff, Chipotle has appreciated almost 20% in the last five days. However, investors shouldn’t consider this rally a start of a turnaround, and I expect Chipotle to continue its downwards trajectory due to its steep valuation.
Why Chipotle hasn’t bottomed yet
The outbreaks have greatly damaged Chipotle’s brand value and the upcoming earnings report is going to be ugly. Analysts are expecting Chipotle to report revenue of $1.01 billion on EPS of $2.01. However, analysts have been cutting back on their earnings estimate drastically as they were expecting the company to report EPS of $4.34 just 60 days ago.
In addition to the declining earnings estimate, the same-store sales are also expected to decline considerably for the quarter. When it comes to same-store sales, it has always been an important metric for Chipotle investors. And a slowdown in comps will not go down well with investors, especially since Chipotle is still trading at the valuation of a growth stock. Chipotle is trading at almost 28x trailing earnings and is expected to report a 5% decline in revenue. Thus, I expect Chipotle to resume its downfall when it reports its Q4 earnings next month.
Chipotle’s problems will likely continue throughout 2016 as year-over-year traffic will decline considerably. According to a recent survey conducted by Morgan Stanley, approximately 15% of the people surveyed said they would not return to eat at Chipotle "for a long time, if ever."
Customers usually have a short memory and forget such incidences in the long-term. Thus, due to the short-term implications of the outbreak, investors should expect Chipotle to fall under $400 in the coming months.
Conclusion
I have always liked Chipotle’s stock and I still believe in the company’s long-term prospects. However, investors shouldn’t bet on the company’s turnaround just yet. Chipotle will continue struggling for at least six months before customers start to forget the outbreak. Hence, I would recommend investors to stay away from Chipotle for now as it can fall to under $400.
