It’s usually not a good thing when a company is mentioned by name by the Centers for Disease Control and Prevention, especially if the organization is a highly popular fast-casual restaurant.
Yet that’s exactly the predicament Chipotle Mexican Grill, Inc. (CMG) find themselves in after suffering massive losses in the financial markets due to an outbreak of Escherichia coli — one that is likely linked to their restaurants.
Aside from the obvious health concerns, many Wall Street analysts are questioning CMG stock’s ability to rise above the ongoing public relations nightmare.
How Bad Is It?
The facts are pretty damning for Chipotle stockholders and loyal patrons alike.
According to the most recent update provided by the CDC, 52 people across nine states have been infected by the E. coli bacterium, which is typically transmitted through contact with fecal matter. Of this total, 90% reported eating at a CMG restaurant a week before succumbing to illness.
Also, the CDC stated that “epidemiologic evidence” points to a food item commonly served at Chipotle as the primary catalyst for the outbreak.
Adding to the pain is a recent outbreak in Massachusetts of what is suspected to be the highly contagious norovirus. According to Reuters, 80 students from Boston College — eight of whom were members of the university’s basketball team — became ill after eating at a CMG restaurant.
Although a company spokesperson was adamant about the outbreak being an isolated incident limited to the store in question, the matter will certainly raise eyebrows. It’s now Chipotle’s fourth food-related violation since August of this year, and the markets are clearly unhappy: CMG stock is down more than 6% for the current month.
In a rather bizarre twist, Chipotle’s chief financial officer, Jack Hartung, failed to take direct and unreserved responsibility for the outbreak. Instead, he chose to lay significant blame on the manner in which the CDC disseminates information to the public, as well as on the mainstream media for capitalizing on the blood on the street left in the wake of CMG stock’s unraveling.
The pressure is certainly understandable. Year-to-date, Chipotle stock is down 19%, with the selloff stemming from the E. coli fiasco reversing what was trending to be double-digit returns for the year.
Public opinion towards the CMG brand name has also dramatically fallen since the food illness incidents came to light, prompting internal concerns about regaining trust among their core consumer base.
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Prior to the controversy, CMG stock was buoyed by strong fundamentals, particularly in terms of profitability. Operating and net margins are both in double-digit percentages, and Chipotle stock’s three-year revenue growth is higher than an overwhelming majority of restaurateurs. Certainly, these numbers will change given management’s forecast slash for 2016, but it would be unfair to dismiss CMG stock’s overall performance entirely over a recent string of safety oversights.
Should You Stick With CMG Stock?
Historically, food companies have come back from much worse incidents. The most obvious example is Jack in the Box Inc. (JACK).
Back in 1993, the quirky fast-food establishment had the dubious distinction of introducing E. coli awareness to the broader public when tainted meat served to its customers led to hundreds of illnesses, and tragically, the passing of four children. In the two years following the incident, JACK stock plummeted nearly 80% against its initial public offering. It wasn’t until the summer of 1997 that early investors were able to break even.
Eventually, those that kept the faith did far better than parity.
The same could be said about CMG stock, which is reflective of a very good company falling on very hard times.
Admittedly, the circumstances are quite ugly, and there is much to be said about CMG’s public maneuvering of an ongoing crisis. Almost certainly, there will be volatility in Chipotle stock over the next several weeks, perhaps months.
But once the dust in the markets finally settles, this could potentially be a shrewd opportunity.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
