Chipotle (CMG) stock has fallen more than 15% over the last month.
This kind of volatility is not unusual for CMG, with there being various times during the last five years when Chipotle stock would dip double digits, but it would always recover behind double-digit comparable-sales growth and strong earnings.
This time, however, could be different, and could very well take CMG all the way to $400.
Chipotle Stock Is Not Worth 30x FY2016 EPS
At $625, if CMG falls to $400 it would represent a big decline — a 45%-plus loss from its all-time high of $758.61. It would also be the third time since 2008 that Chipotle stock lost more than 40% of its value from previous highs.
Nevertheless, the reason that CMG is at risk of such big losses is neither technical nor is it something that will end up creating investment value. Instead, it’s a correction — the process of getting Chipotle stock price back to where it belongs.
Nowadays, Chipotle does not have the growth premium versus its competitors that it once had. This is a company that had maintained double-digit comparable sales growth in recent years behind increased store traffic and price hikes. That growth kept its stock multiples at a premium, but with its comparable store sales growing just 5.5% in the first nine months of 2015 and just 2.6% in its most recent quarter, there are countless restaurants growing faster than Chipotle.
Not to mention, Chipotle’s fiscal year 2016 guidance for comparable store sales growth in the low single digits makes the company look even more average, and deserving of an industry-average stock multiple.
To get an idea of what Chipotle stock is worth, take a look at the chart below.
| Company | last quarter comp growth | Comp growth outlook | forward P/E ratio |
| Chipotle | 2.6% | low-single digit | 30.5 |
| Buffalo Wild Wings (BWLD) | 3.9% | low-single digit | 23.7 |
| Darden (DRI) | 3.4% | low-single digit | 14.9 |
| Sonic (SONC) | 7.3% | low-single digit | 18.6 |
The bottom line is that CMG is growing the slowest, yet is most expensive by a long shot.
Up until this point, Chipotle stock has had high investor sentiment on its side, thereby keeping its stock multiples higher. However, all that could change after E. coli breakouts caused the company to close 43 stores for 11 days in the Pacific Northwest.
Things like this can have a lingering effect for restaurants, something we won’t know until later.
With that said, it is worth noting that shares of CMG have fallen double-digits since the E. coli breakouts were first reported. This could be the first sign of changing sentiment for the stock.
Why CMG Stock Is Worth $400
Nevertheless, BWLD fell more than 15% late last month after it provided guidance that was nearly identical to CMG and grew overall revenue and comparable sales even faster than CMG. Given that CMG is more expensive, this suggests that the Chipotle stock price could have further to fall if investor sentiment turns sour — which, judging by its performance the last month, is starting to happen.
A price of $400 would put Chipotle stock at nearly 20 times the FY2016 EPS expectations of $20.41. That would be better aligned with how the company is performing, and also the multiples of the three restaurants noted above. Furthermore, $400 would represent a loss of about 45% from its 52-week high, which also happened in 2008 and 2012.
The difference is that Chipotle stock may not recover to trade with the same lavish multiples that it has in years before. And that’s because of slowed growth, declining margins and the fact that Chipotle is becoming a more mature business.
Therein lies the problem for CMG stock — it is no longer deserving of a valuation at 30 times next year’s earnings, and that could mean its stock losses are permanent.
As of this writing, Brian Nichols did not own shares of CMG.
