Chipotle Mexican Grill, Inc.: Why CMG Stock Is a Brewing Value

Chipotle Mexican Grill (CMG) has been in the doghouse with investors lately, losing over 20% this year (before Thursday’s 4% rally), including more than a 28% reversal since shares touched a 52-week high in early August.

Chipotle Mexican Grill, Inc.: Why CMG Stock Is a Brewing ValueThis drop is especially notable considering Chipotle stock has been a momentum darling for years now.

Why the change of heart? Well, investors have indeed been skittish for a few good reasons.

The Ugly Side of CMG

  • In mid-October, the growth stock posted an earnings miss that sent shares 7% lower in one day.
  • Since then, investors have been concerned about an E. coli outbreak that’s been reported to have led to 52 people in nine states falling ill.
  • Chipotle has closed locations as a result of the outbreak — including a high-profile closing in Boston recently — and has downgraded forecasts as well.
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  • The company is now predicting its first drop in quarterly same-store sales since it went public in 2006. The drop is slated to come in between 8% and 11% vs. previous estimates for a slight uptick.
  • Management now expects earnings to come in between the range of $2.45 to $2.85 a share vs. a consensus of $4.06 a share.

This is one ugly laundry list of bad news, but I’m confident the trouble will all blow over soon enough. If you’re looking for a steady, growing company, Chipotle still fits the bill and the recent damage spells opportunity.

The Long-Term Case for Chipotle Stock

In case you’re not familiar with the fast-casual food chain — where you can often find diners wrapping around the block to grab a bite to eat — Chipotle operates 1,755 restaurants in the states, plus a dozen or so internationally. The company has been credited for disrupting and redefining fast food and continues to forge ahead to that end. It has also introduced two new restaurant concepts outside Chipotle Mexican Grill.

While the recent E. coli scare is indeed concerning, Chipotle has been quick to set things straight and up its food safety standards. Considering its track record for innovation, I’m confident this will go as planned.

When that happens and this outbreak blows over, Chipotle will continue to dominate the industry it has defined and continue to expand. The company is quite reminiscent of Starbucks (SBUX) in its brand strength and cutting-edge concept.

It’s also on a similar path with regards to ubiquity, although it currently has only 10% or so of the locations of the coffee chain, it plans to keep more popping up. For the rest of the year, Chipotle recently increased its guidance to 215 to 225 new restaurant openings. And for 2016, it expects 220 to 235 new restaurant openings.

While it’s been tempting to think that Starbucks simply couldn’t keep its growth going considering the sheer number of locations it’s boasted for years, that hasn’t been the case.

Just consider the chart below comparing SBUX and CMG.


The parallel upward momentum of Starbucks should also quell concerns about Chipotle’s valuation. Both companies have sported premiums to the broader market precisely because of the value and innovation they offer. Chipotle’s valuation may seem especially frothy given recent forecasts, but those forecasts will be back to normal ranges after a few quarters.

So do I expect short-term volatility and weakness for CMG? Yes. That’s the catch-22 of being a superstar stock — media chatter and negative publicity actually matter and will continue to weigh on shares. But if you have a long-term time horizon, as many investors should, Chipotle stock still remains a promising investment.

Once momentum is back on track, investors will remember all the strong fundamentals CMG offers. JPMorgan analyst John Ivankoe agrees. He believes the recent pullback is a buying opportunity and maintained his “overweight” rating on the stock thanks to “long-term potential, driven by factors including unit growth, pricing, extended hours, the return of its popular Carnitas and mobile ordering.”

When that laundry list of reasons to buy Chipotle stock replaces the aforementioned list of problems, you can bet you’ll want to be long.

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10High Octane Trader,Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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