At the beginning of the year, Chipotle Mexican Grill, Inc. (CMG) was in a really tough spot. The image, the business and the CMG stock price all took severe, direct hits. Chipotle was in turmoil, and it wasn’t clear when, how or if the burrito chain could recover from its PR nightmare.
Chipotle stock lost 29% in 2015, plunging from highs above $750 a share to a meager $480 per share to close the year.
As you probably heard, the main catalyst was a series of E. coli, norovirus and salmonella outbreaks at Chipotle locations throughout the country.
In the first few weeks of 2016, things only got worse: CMG stock hit a multi-year low at $399 after the company announced that same-store sales slid 14.6% in the fourth quarter and a criminal investigation was launched regarding a norovirus outbreak at a California location last summer.
Since then, however, shares have slowly but surely recovered. And after some fascinating remarks this week from a Wall Street analyst, I believe the worst may be over for the CMG stock price. (At least for the short term.)
William Blair: “Sentiment Bottomed” in January
William Blair analyst Sharon Zackfia put out a research note this week that made a bold prediction, and one that could nearly guarantee Chipotle’s stock price won’t test its $400-level lows anytime this year:
“It appears that sentiment bottomed in January, with willingness to eat at Chipotle increasing after the company’s digital coupon for a free entrée spurred improved traffic in the latter half of February.”
She’s referring to a coupon Chipotle made available for anyone to claim after CMG held a company-wide meeting at all 2,000 of its locations discussing food safety measures aimed at preventing another outbreak. Its decision to close thousands of locations for several hours — during the lunch rush, no less — made national headlines.
It was a solid PR move, and although Chipotle is still struggling to regain customers it lost after the series of food safety snafus, it is regaining them, according to the William Blair survey. The fast-casual restaurant chain also just hired the legendary PR agency Burson-Marsteller in an attempt to double down on a smooth but rapid recovery.
Bottom Line on Chipotle Stock
Personally, I think the worst is over for Chipotle and for CMG stock owners. Extremely subdued expectations for both this quarter and this fiscal year are now baked into the stock. Unless a huge percentage of disgusted customers never return, Chipotle should rebound nicely. To some extent, it already has.
Chipotle shares are up 12% on the year and have rallied nearly 35% from their $399 low. There may be some more room to run in the short term, and some technical analysts have called for a rally all the way to $660.
While technical analysts don’t really care much about this sort of thing, I personally avoided Chipotle for some time before cashing in on my free burrito. Then yesterday, I actually bought a burrito with my own money. I suspect I’m not alone in my behavior.
With that said, a price target of $660 for CMG stock is a little too optimistic. Already, shares trade at 35 times trailing earnings, 65 times projected 2016 earnings and 36 times fiscal 2017 earnings projections.
Yet Chipotle is no longer much of a growth stock. Even before the food safety meltdown, same-store sales growth was rapidly decelerating and labor costs were soaring. That’s precisely why I declared CMG’s Cinderella story over on Oct. 21 — before the E. coli headlines caused investors to sell the stock into obscurity.
I got a lot of pushback from readers for that article, but anyone who sold Chipotle shares then, at $665, was able to avoid some extreme volatility and roughly 20% losses. And although I think Chipotle may ultimately break the $600 level in 2016 as customers return, the stock remains overpriced and I wouldn’t roll the dice with this has-been.
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.
