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Harsh Jain
Harsh Jain
Articles (219) 

Chipotle Mexican Grill: Should You Get In?

The company still needs to do a lot of work to repair its brand image

October 10, 2017 | About:

Chipotle Mexican Grill’s (NYSE:CMG) shares have been on a downhill run since the first safety issue at its restaurants in July 2015. The stock is down nearly 60% from its all-time high and 18% year to date. Also, the stock trades at a level not seen since 2013 and looks like it will not be able to turn things around anytime soon.

The burrito chain has experienced a huge decline in average visits, and its top line remains well below where it was before the food safety issue. Also, the drop in customers hurt its profitability with net income margins falling to just 0.6% in 2016, representing a decline of 10% compared to that in 2015. Although the burrito chain’s profitability has recovered somewhat this year, it still remains weakened.

Queso is one of the most popular menu items in the U.S. In the past, Chipotle avoided adding queso to its menu in order to prevent the use of industrial additives used in quesos. The burrito chain, though, launched the healthy queso nationwide last month but failed to impress consumers.

Chipotle introduced queso to compete efficiently against small competitors who have been serving queso with burritos and chips for years as well as to regain its lost customers. Before rolling out queso nationwide, Chipotle first began testing queso in around 350 stores in California and Colorado.

During the testing period, Chipotle’s queso received tepid reviews, which many said had a powdery and grainy texture. On the other hand, Del Taco Restaurants (NASDAQ:TACO) also launched its new queso blanco  free of artificial flavors, colors or preservatives  last month. It has been getting good reviews mainly due to its smooth and creamy texture.

Moreover, Del Taco’s queso is available as an add-on for just 50 cents. Del Taco’s queso side order, without chips, costs $1 compared to Chipotle’s $2.10. As of now, it looks like Del Taco has won the queso war with Chipotle. To make matters worse, many customers have also claimed that Chipotle has degraded the quality of its chips.

As of now, Del Taco’s queso poses a direct threat to Chipotle, which makes things even more difficult for Chipotle at a time when it is already trying hard to regain its lost customers. Apart from this, the burrito chain will also face problems going forward due to weak industry trends.

Consumers are demanding high-quality products at lower prices, which in turn forces grocery stores to reduce their food prices in order to survive in the highly competitive environment.

As a result, same-store sales growth has been gloomy over the past few quarters. Foot traffic and profits at many restaurant chains have also declined. Moving ahead, the second quarter accounted for the sixth consecutive of negative same-store sales for the restaurant industry.

Summing up

Food safety scandals over the past couple of years have taken a toll on Chipotle’s share price. The burrito chain, though, is putting in a lot of effort to repair its damaged brand image. At present, it is necessary for Chipotle to improve its comps in order to recover profitability, and queso probably would not be the catalyst to make that happen. Also, the company’s operating expenses continue growing at a considerable pace.

Chipotle trades at a price-earnings (P/E) ratio of almost 65, suggesting it is still expensive keeping in mind the existing profitability level. If the burrito chain’s profitability recovers to 2015 levels, situations could change entirely, but that is not going to happen anytime soon as the company needs to do a lot of work to regain its lost customers.

I would recommend shareholders watch the stock from sideways and wait until the company’s path to profitability looks clear before initiating a position in the stock.

Disclosure: No positions in the stocks mentioned in this article.

Rating: 5.0/5 (3 votes)



DanaBoy - 9 months ago    Report SPAM

Chipotle Mexican Grill stock is NOT worth buying.

I buy and invest in companies based on financial metrics that Wall Street doesn't care about. Wall Street has always been obsessed with fake metrics like the P/E ratio and other such fake metrics.

I research stocks and companies based on metrics like the enterprise value and free cash flow and owner earnings metrics.

So, for example, Chipotle's trailing 12-month enterprise value to free cash flow ratio is 52.59. What this means is when this ratio is converted to a yield -- not unlike a bond yield -- over the last 12 months this stock has returned a piddly 1.90%. So, if you would have theoretically bought the company and paid the enterprise value and received the trailing 12-months free cash flow of $167 million, your return only would have been 1.90%.

You could have invested in the 10-year U.S. Treasury bond and had a better and SAFER return. I say "safer" because the bond is back up by the full faith and credit of the U.S. Federal government.

Further, over the last 5 fiscal years, Chipotle's free cash yield has only ranged from 0.86% to 3.04%.

Does this really sound like a company you'd want to invest in?

I think people should leave the market gambling to Wall Street. But, it's your money and I can't tell you what to do with it. ;)

Mocheng - 9 months ago    Report SPAM

C59661 You've made some good points, I wouldn't call PE as fake number, it's true that the PE value can be altered easily if they wanted to, for example, they can count income from investing activites in the PE, or even the money borrowed from a bank as income.

You are purely looking at CMG at the current earning levels, however, they were a growth company before these bad news started coming in couple of years ago, I think the those bad news will fade away, when it returned to a growth company, your numbers don't matter.

DanaBoy - 9 months ago    Report SPAM

@Mocheng The PE ratio is CLEARLY a fake number. Why is that a company can report growing and exploding earnings, but STILL go out of business? That's because they generated NO CASH!

Does the company Enron ring a bell?

That company was Wall Street darling, when it was reporting exploding earnings -- but at the same time was generated NO cash. Yes, in the short term Wall Street ran the share price up based on those "earnings". But, what eventualy happened? The company went BANKRUPTED.

With you thinking about the PE raio, you ar just a part of that SAME Wall Stree crowd.

And, no, I am not loking at Chipotle's current income levels. Frankly, I don't CARE about Chipotle's income levels! I care ONLY abou the cash.

And, the numbers you refer to are not MY numbers. They are the company's historic numbers -- so hey DO matter!

You really aren't telling m a company's histori financial numbers have no bearing on the future are you? No, the PAST numbers are no a crystal ball to predict the future. But, those numbers do give insigh into what MAY happen.

Mungermice - 8 months ago    Report SPAM

Chipotle was hit by the scandals and before was overvalued because it was a Wall Street darling. Now you can see in the Lynch Chart how price and earnings soon will kiss each other and i see a huge rebound like Pershing Square also see. The fundamentals remain the same, they constantly expanding in restaurant numbers each year also now where many think CMG is damned to fail. Far from the truth for me. Wait until the FUD is gone and you'll see a much healthier business than before with a huge discount, which i see already. I think also the brand remains strong, if you think of the kind of food they offer. In germany there is exactly one restaurant in Frankfurt and if i had the chance i would immediately visit them to taste the yummy burritos and all the great stuff! I'm hungry for the company to expand also in germany, because the concept is great and they were hit by a sledge hammer and have done everything to come back and i think they will, maybe already til mid 2018 or a bit later.

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