Chipotle Mexican Grill, Inc. (NYSE:CMG) has lost its spice, and Chipotle stock is off more than 40% over the past 12 months. However, things might be taking a turn for the better. Bill Ackman, who runs the hedge fund Pershing Square, has taken a hefty 9.9% stake in the company. The news, out Tuesday evening, sparked CMG stock to 6% gains in after-hours trading.
Not long ago, Chipotle was a can’t-miss momentum growth play. But in 2015, CMG stumbled because of quality problems, including the outbreaks of E. coli, norovirus and salmonella across various locations.
Naturally, that drove consumers away in drovers. Last quarter, same-store sales plunged by 24% — and that was an improvement over the prior quarter’s precipitous drop of nearly 30%!
Chipotle has tried to recover by focusing on aggressive promotions. That includes tons of free burritos and the launch of a loyalty program. But so far, these moves haven’t done enough to allay customers’ fears. A recent report from Morgan Stanley (NYSE:MS) indicates that a recovery could take years.
It’s unclear what Bill Ackman plans to do to rejuvenate Chipotle stock. But it’s a good bet that he’ll try to get management more focused on putting better systems and infrastructure in place. And seeing as how Ackman is now the second-largest CMG shareholder, he’ll have all the leverage he needs.
But CMG longs shouldn’t celebrate quite yet.
Chipotle (CMG) Isn’t Saved Yet
Ackman’s track record isn’t so hot. His year-to-date performance on his hedge fund is a miserable -15.5%. Ackman has made big-time blunders with trades on Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and Herbalife Ltd. (NYSE:HLF). So an Ackman pick is far from a sure thing.
And Ackman’s SEC filing says Chipotle stock is undervalued, which seems a bit suspect. CMG trades at nearly 40 times forward earnings estimates. By comparison, Jack in the Box Inc. (NASDAQ:JACK) trades at 21X and Chuy’s Holdings Inc. (NASDAQ:CHUY) trades at 25X.
Moreover, the current environment for restaurant operators looks increasingly grim. The competitive landscape for the fast-casual space is highly competitive, and CMG’s rivals already are capitalizing on the company’s travails. Cost pressures continue to weigh on Chipotle, too, as the country trends toward higher minimum wages and a federal law imposing more requirements on overtime pay looms.
Bill Ackman may be able to shake CMG up, but his presence alone doesn’t justify today’s bump in Chipotle stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
