In that post, readers were shown that CMG stock could not overcome a huge valuation disconnect relative to its competitors, and that the E. coli scandal would have a lingering effect.
Now that Chipotle stock has in fact fallen to this $400 level, and its price-earnings ratio has been cut in half from a 50-plus peak last year, is it time to take a chance on CMG?
Buy Chipotle Stock at $400?
The simple answer to this question is no, you don’t buy Chipotle stock right now, and there are many reasons why.
The most significant reason is that the fallout surrounding Chipotle’s E. coli problems are just heating up. Back in late December health officials estimated that at least 50 people in nine states were affected by Chipotle’s E. Coli breakout.
Then, just recently, Chipotle disclosed that fourth-quarter comparable sales fell 14.6% and that it had received a federal subpoena related to the virus. That subpoena was just one of the many issues created by Chipotle’s E. Coli problem.
Analysts everywhere are downgrading the stock and revising their outlook lower. The company is now facing investor lawsuits, federal investigations, and most importantly, prolonged operating uncertainty as a result of these issues.
Collectively, this does not bode well for Chipotle stock or its business.
An Uncertain Future for CMG
The problem is that anytime there is a large and very public food-related issue at a restaurant, it changes how consumers behave. CNBC did a survey shortly after the E. Coli breakout finding that 51% of respondents had stopped eating at Chipotle. Furthermore, only 23% said they had no concerns whatsoever.
This survey is quite damning, leaving the big question when those lost consumers will return, if ever? As of now, there is no way to know what long-term lingering effects may come from the E. Coli breakout.
Therefore, investors must consider this fact before buying Chipotle stock.
Chipotle Stock Could Fall to $250
To make matters worse, it’s really hard to know how Chipotle will perform over the next year, or two, given these problems.
This unknown could not be any more evident than with earnings per share expectations for 2016. Three months ago analysts expected CMG to earn $20.65 per share in 2016, but that number has since been reduced to just $13.92. This represents a full $1 loss vs. a 2015 that also saw its outlook revised lower.
As a result, CMG trades at 29 times 2016’s earnings, which in retrospect, does not represent too much of a discount compared to three months earlier. If we look back to early October when CMG stock was trading over $700, and analysts were expecting $20.65 per share for 2016, Chipotle stock traded at less than 34 times 2016’s expected earnings.
In other words, CMG stock has not really gotten much cheaper during the last three months. Fact is, Chipotle’s outlook has worsened and its stock has fallen to reflect this fact.
As a result, I still think 29 times next year’s earnings is far too expensive, especially given that Chipotle has gone from a company with mid-single digit comp growth to one with double-digit comp losses in a matter of months.
For this reason, investors should expect multiple depreciation in Chipotle stock. It’s inevitable. At the end of the day, I could see CMG stock falling to $250 before reversing; because if analyst expectations for the full year remain unchanged, that would give Chipotle an earnings multiple of nearly 18.
That’s much more reasonable for a company whose nightmare may just be getting started.
As of this writing, Brian Nichols does not own any of the aforementioned stocks.
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