It has been tough time for fast casual innovator Chipotle Mexican Grill, Inc. (CMG). Earnings are not growing as fast as they once did, and the outbreaks of E. coli and norovirus gave the company a major public relations headache.
As a result, Chipotle stock sold off from its high of $758 all the way down to $399. Although Chipotle stock has since recovered to $460, it is a good idea to check in and see if the headwinds facing CMG are abating and if Chipotle stock is worth buying at these levels.
The virus outbreaks really slammed the company in the fourth quarter, when management told investors that same-store sales crashed 15% for the quarter and 30% for December alone. It also said that it will be implementing strict policies that its CFO, Jack Hartung, said will “be messy in terms of margins and earnings” for all of 2016.
The bad news is that foodborne illnesses attached to companies can really dog business for quite some time. People take the safety of their food for granted, so when something like this happens, it can severely undermine the public’s faith in a product.
The good news, however, is that management is being communicative with the public and with employees. Closing restaurants all day on Feb. 8 to update employees — and presumably institute new safety measures — communicates to the public that CMG is taking this issue seriously. Thus, I do expect faith in the food safety to return in relatively short order.
Chipotle by the Numbers
However, Chipotle stock has another potential headwind in the form of a lousy economy that shows no signs of improvement. While fast casual is somewhat insulated from the worst of it, because it isn’t outrageously expensive, it may feel some impact if things get worse before they get better.
Chipotle stock has other positives going for it as well. It’s in great financial shape. It has almost $1.6 billion in cash and investments and no long-term debt, or about $53 per share in cash. Thus, it can continue with business even under these less-favorable conditions without having to pay interest to creditors.
It generated about $450 million in trailing-twelve-month free cash flow, so even in bad times, it should generate plenty of operating cash flow so as not to materially impact the business. It could even keep expanding.
At this point, then, my concern is really about valuation. Backing out the cash, CMG stock effectively trades at $407 per share. Estimates for the lousy 2016 fiscal year are expected to be $14.83 per share, down from $14.92. Obviously, that would be expected to increase in years after. Long-term analyst estimates are for about 15% annualized growth, but I’d give it as much as a 30% premium given its amazing cash flow, solid balance sheet and strong brand name. So paying a 20x multiple is not unreasonable.
Alas, at $13.46 per share, a 20x multiple only justifies a $270 stock price. I mean, even if I were willing to pay a PEG ratio of 2 based on earnings – or a 30x valuation — I can only get to about $400. We aren’t far off from that, but there’s one other concern I have.
Super-hot stocks like this have a tendency to skyrocket and then crash back down to earth. I’m concerned the top has been seen.
Coupled with the overall lousy stock market outlook for the year, I think I’m going to avoid Chipotle stock for now.
As of this writing, Lawrence Meyers has no position in any stocks mentioned.
