When companies IPO, the insiders want to see the newly public stock roar higher and higher as the world gains a newfound appreciation for their company. That scenario also makes them a lot more money.
It’s not particularly unusual for an IPO to have a huge first-day gain, but what Chipotle Mexican Grill, Inc. (CMG) stock did was more than just a one-day bump. At the ring of the closing bell yesterday, the CMG stock price was $449.03, up more than 20-fold from its $22 offer price less than 10 years ago.
True, retail investors would’ve been forced to buy CMG after it had already shot up 100% in premarket trade, but at $44 per share, no one’s complaining about 900% returns in 10 years.
Unfortunately, the vast majority of current investors did not buy in on Day One, and are probably sitting on double-digit losses instead of 900% gains.
Including midday losses (Chipotle shares are down more than 4% as I’m writing this), CMG stock has lost around 40% of its value in the last five months.
Sometimes — in fact, quite frequently — markets overreact and panic-sell a certain stock, creating an opportunity for gutsy value investors to swoop in and pick up a bargain deal just as the crowds are headed for the exits.
This is not one of those times.
With CMG, it’s not just crowds of investors that are leaving, it’s crowds of customers … and as an investor, that’s impossible to ignore.
It seems that each day brings worse news than the next, and Wednesday was no different: Chipotle was served with a grand jury subpoena regarding a criminal investigation into an outbreak of norovirus at one of its stores in California over the summer.
But wait: It gets worse.
Same-Store Sales Skid Steepens
Sadly, Chipotle’s same-store sales skid steepened, said the company in a statement via SEC documents. The burrito chain now predicts same-store sales (SSS) slid severely, slumping 14.6% in the fiscal fourth quarter.
CMG had previously predicted SSS would probably plunge between 8% and 11%, but the customer exodus eventually exacerbated after an “isolated incident” of norovirus at a Chipotle location in Brighton, Massachusetts, during the week of Dec. 7.
That wasn’t much help to the image of Chipotle, which was already reeling from E. coli outbreaks associated with multiple store locations in October and November. More than 50 people in nine states were affected by that outbreak.
The norovirus incident under investigation occurred in California in late August, and ended up getting nearly 100 people sick. In the U.K., the norovirus is known as the “winter vomiting bug,” so you can imagine it isn’t pleasant. It’s easily spread through person-to-person contact, contaminated surfaces, or food and drink contaminated with fecal matter.
The abysmal fourth quarter will mark the first time in CMG history that SSS have declined year-over-year; needless to say, Chipotle has never seen such a swift, unceremonious swing in sentiment as it is suffering through presently.
The CMG stock price, which reached all-time highs near $760 per share in August, is trading around $430 now, and at 27 times forward earnings, it still looks overvalued — even after Wall Street analysts slashed earnings estimates.
A mere two months ago, Wall Street expected CMG stock to earn $20.41 per share in fiscal 2016. Today, analysts expect 2016 EPS of $15.98, a 22% decline from 60 days earlier.
In its SEC statement on Wednesday, Chipotle stock lowered its own EPS guidance for Q4 2015 to the range of $1.70 to $1.90. Roughly a month ago, on Dec. 4, it had guided for Q4 EPS between $2.45 and $2.85 per share. At that time, the Street was expecting $4.09 per share.
The consensus estimate before today’s guidance from the company had fallen all the way to $2.55.
Bottom Line for Chipotle Stock
The one bright spot in today’s news? Chipotle will be buying back $300 million in CMG stock. Likely meant to inspire investor confidence by showing management’s faith in the company going forward, it’s simply too little, too late.
The fact that the repurchase announcement is a meaningless and ill-timed gesture makes it all the more clear that investors should steer clear of CMG stock at all costs — or sell and swallow their pride if they own it already.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
