Shares of Chipotle Mexican Grill (CMG, Financial) have performed well over the last few weeks due to the release of the company's preliminary results earlier this month. Although Chipotle's results are expected to miss estimates, shares soared. The company is scheduled to report its earnings next month. With the expected good news already priced into the current share price however, I think investors should avoid the stock. Given Chipotle's valuation, I think the stock has considerable downside to offer going forward.Â
Expected results
As per Yahoo Finance, analysts are expecting Chipotle to post earnings of 65 cents per share, down from $2.17 reported in the corresponding quarter last year. On the sales front, analysts are expecting the company to rake in $1.04 billion, up 4% year over year.
The company has already said it is going to miss on both earnings as well as revenue, primarily due to higher expenses. The company is still spending heavily on marketing and promotions, which has been the same for over a year. Since Chipotle is still struggling to improve its sales despite the ever-increasing expenses however, investors should avoid the stock heading into earnings.
Due to falling earnings and increased expenses, Chipotle is currently trading at a trailing price-earnings (P/E) ratio of 163. No matter how you look at it, the stock is expensive and the company’s growth estimates do not justify its valuation. Although Chipotle is expected to post double-digit growth going forward, its P/E ratio is already too high.
Conclusion
The fact that Chipotle's increasing expenditures have not helped it curb its dwindling sales shows management has failed to execute a successful turnaround plan. Amid falling earnings and increasing expenditures, I think the stock will struggle to justify its valuation and reality will eventually catch up.
Investors looking to initiate a new position should probably wait for a few more quarters as the stock can easily come down to $320 due to weak fundamentals. Hence, Chipotle is a sell going into the earnings report.
Disclosure: No position.
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