Chipotle Mexican Grill, Inc.: CMG Stock Holders Will Be Miserable for MONTHS

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Costs at Chipotle Mexican Grill, Inc. (CMG) are only rising as the company tries to recover from giving a bunch of customers diarrhea, and that’s going to be a headwind for Chipotle stock for a long time.

Chipotle Mexican Grill, Inc.: CMG Stock Holders Will Be Miserable for MONTHSExpense reduction is one of Wall Street’s favorite tricks because it’s a margin builder. Deep enough cost cuts can even let a company leverage lower sales into profit growth.

The opposite is happening at Chipotle: Higher costs related to the emergence of E. coli bacteria and norovirus at several restaurants have forced analysts to mark down their already pessimistic forecasts.

After CMG’s latest move, they may need to again.

In another bid to reinvigorate sales — and the Chipotle stock price — Chipotle doubled the amount of free food managers are allowed to give away at their respective restaurants. Assuming the free Chipotle is disease-free, that’s a fine addition to its efforts to rebuild the brand.

But it’s also just the latest example of cost expansion at the revenue challenged chain.

On Feb. 8, the company will close all of its U.S. locations until 3 p.m. to discuss recent and future food safety changes. That’s a half-day of lost sales at more than 1,700 restaurants, while labor costs remain the same.

This stuff adds up, especially when other expenses are rising too. Chipotle plans to launch an exhaustive marketing campaign in about a month. From direct mail to traditional ad sales, that’s going to be pretty pricey.

CMG Expenses Pressure Profits

Chipotle’s food scandals haven’t been kind to sales, which are expected to fall almost 6% this quarter. And after growing 30% year-over-year in 2014, revenue is forecast to rise 9% for the fiscal 2015 and only 3.5% by the end of fiscal 2016.

If CMG keeps adding incremental costs like free food, you can bet that earnings this year will be even worse than the Street expects. At this point, analysts already project a 10% drop in earnings per share for fiscal 2016, according to a survey by Thomson Reuters.

Chipotle stock looks suspect on a valuation basis as it is: It’s changing hands at 35 times forward earnings on a long-term growth rate of less than 15%. Shares were able to justify that premium when sales were growing 30% a year.

How long it takes for Chipotle to recover to such levels is anyone’s guess, but it looks well more than a year out.

CMG stock fell as far as 3.6% by mid-day trading thanks to the free food notice. And this came while the Dow Jones Industrial Average was having a triple-digit gain.

Chipotle stock rallied hard over the last week, but now it’s petering out. At some point it will be worth picking up on valuation, but for now, CMG remains a falling knife.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/01/chipotle-cmg-stock-free-food/.

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