Chipotle Mexican Grill, Inc. (NYSE:CMG) is well known for its burritos wrapped in shiny foil. But CMG stock has had plenty of recent problems that indicate Chipotle may be becoming better known for food poisoning than its food.
The list of food-borne illnesses links to Chipotle Mexican Grill include salmonella, E. coli and norovirus. That would be unpleasant enough for investors in CMG to stomach, but now there is a growing class action lawsuit led by customers who became sick after eating at the restaurant.
This may sound frivolous, but it’s serious business. There has already been some significant brand tarnish to Chipotle in the wake of the outbreaks, and the lawsuits risk dragging out these troubles even further.
That’s something CMG stock investors cannot afford.
CMG Stock Is Doomed in 2016
The tale of the tape is depressing; Chipotle stock is off over 30% in three months and continues to set new 52-week lows.
There are many reasons for this beyond just food poisoning, too. The most recent earnings report from Chipotle stock was ugly, with the company missing its profit targets and seeing a dramatic slowdown in growth.
Specifically, CMG’s third-quarter results showed same-store sales up 2.6% and revenue 12.2% higher overall for CMG stock … but in the third quarter of 2014, it saw same-store sales growth of 19.8% on revenue growth of 31.1%!
And with rising costs causing lower margins, the threat of continued earnings headwinds will persist even as the food poisoning troubles drive some customers away.
The lawsuit against Chipotle adds fuel to this fire. Even if there ultimately is not a big judgement on paper, the legal fees will come at a time when margins at CMG stock can ill-afford them.
And perhaps most disturbing of all, the burrito chain has already had previous struggles with its image. Remember when Chipotle had to pull carnitas from the menu at hundreds of locations at the beginning of the year thanks to supply chain issues?
And its branding as a fresh and healthy alternative to burger chains like McDonald’s Corporation (NYSE:MCD), Wendys Co.(NASDAQ:WEN) and Yum! Brands, Inc. (NYSE:YUM) is becoming harder to uphold, as some sour cream-slathered offerings can approach 1,000 calories and $10 a pop, depending on the location.
A protracted lawsuit will mean even more distractions for CMG stock at a time when momentum is waning and the margin for error is thin at best.
When you add it all up, it looks like 2016 is going to leave a bad taste in the mouths of investors who own stock in Chipotle Mexican Grill, Inc.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
