Chipotle Mexican Grill: What Happens After CMG Stock Falls to $400?

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Since Chipotle (CMG) stock surpassed $700, I have been a rather vocal bear. And just recently, with CMG stock at $620, I explained why it was likely to fall and reach $400 in the foreseeable future.

Chipotle: What Happens After CMG Stock Falls to $400?At the time, $400 seemed crazy, but after it dropped another $70, that $400 target does not seem so unrealistic.

However, the more important question is, once CMG stock falls to $400, will it then be a good time to buy?

The Simple Answer Is No!

Up until earlier this year, Chipotle’s food was characterized as high-quality, healthy and generally worth the premium price. These things, along with growing margins and industry-leading comparable sales growth, helped CMG stock trade at a very rich premium to its peers since its IPO in 2006.

Unfortunately, Chipotle’s comparable-store sales growth has decelerated rapidly, growing just 2.6% during its last quarter, and it is only going to get worse from this point forward.

As a result, $400 will likely prove to be too rich for CMG stock, as it is likely to go far lower.

What’s Pushing CMG Stock Lower?

The worst thing that can happen for a large restaurant with a rich valuation is some sort of food contamination issue. That’s exactly what Chipotle is having to endure right now.

It does not matter than Chipotle serves thousands of customers daily — the only thing that investors care about is the nine states with food-related illness outbreaks. Of course, these are instances with links to Chipotle.

The most recent came from Boston College, where 30 students apparently got sick from the norovirus after dining at Chipotle.

News such as the E. coli and norovirus outbreaks can have a lingering effect on a restaurant. Already, Chipotle management has said that sales for Q4 will fall 8% to 11%. Furthermore, the company issued EPS guidance at a midpoint of $2.65 for the quarter, which was well shy of the expected EPS of $4-plus.

Lastly, management noted that it could not yet provide guidance for 2016 because of trends that are causing this sudden weakness.

Is $300 Possible?

Now keep in mind, when Chipotle management provided this dismal guidance, marking the first time since its 2006 IPO that sales will decline year-over-year, the norovirus outbreak Boston College was not considered.

Given this latest trouble coupled with the likelihood that the spread of E. coli goes well beyond nine states, there is a very good chance that Chipotle’s operating performance will be even worse than feared.

All things considered, Chipotle’s EPS expectations for 2016 have fallen off a cliff over the last month. Chipotle was expected to earn $20.40 per share in 2016, but one month later, expectations have fallen to just $16.99.

On top of this, there is a really good chance that Chipotle’s revenue growth is at a loss in 2016. Therefore, even if CMG stock reaches $400, it would be hard to call it valuable at 23 times forward earnings with an ongoing E. coli issue, revenue losses and crumbling margins.

As noted in my last article, Darden (DRI) is guiding for low-single-digit comparable sales growth in 2016, yet trades at a far cheaper multiple, 16 times next year’s earnings. Hence, Darden at its current stock price looks far more favorable than CMG stock under $400,

The bottom line is that it is hard to see CMG stock making a speedy, or even a full, recovery from these E. coli outbreaks given the fact that revenue growth was already slowing significantly prior to such problems.

All things considered, $400 is definitely too expensive for CMG stock, so it is safe to say that investors should not try and catch this falling knife any time soon.

As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/happens-cmg-stock-falls-400/.

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