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Chipotle Mexican Grill, Inc. (CMG): The Good, The Bad, The Ugly … And The Missing

The E. coli scare is over, but Chipotle still has a few issues that could weigh mightily on shares

Chipotle Mexican Grill, Inc. (CMG) just put out fourth-quarter results that no one expected to be good (they weren’t), and investors now can expect Chipotle stock to continue to trade erratically and irrationally.

Chipotle stock

The bull-versus-bear debate is just getting started … and it’s complicated.

But now that we’ve put a few days’ worth of distance between us and the Q4 earnings report, let’s take a look at what there is to like and that there is to not like about Chipotle stock.

Chipotle’s Earnings Recap

The good: Chipotle’s earnings in the fourth quarter were actually better than expected. Chipotle earned $2.17 per share compared to management’s revised guidance of $1.70 to $1.90.

The bad: While it was obvious that CMG’s earnings would consist of a same-store sales decline, that dip actually began prior to the E. coli outbreak.

The ugly: Chipotle ended December recording a 37% decline in same-store sales, and January’s comps showed no signs of improving.

First-Quarter Outlook

The good: Chipotle has committed $50 million in additional marketing and promotional spend to improve consumer sentiment — something that should help in concert with the Centers for Disease Control’s “all clear” from the E. coli outbreaks.

The bad: CMG will invest nearly all of its near-term profit in the marketing initiative, which calls into question the company’s near-term margin improvements.

The ugly: Chipotle’s Chief Creative and Development Officer said during its Q3 earnings call that the company “deliberately” spends less on marketing so it can afford higher-quality ingredients. Chipotle stock holders might worry about the company’s complete 180 from the core image that CMG has long embraced.

2016 Outlook

The good: Chipotle’s stock won’t really be judged much on its 2016 outlook as there was no real guidance for things like earnings and revenues. All investors got was the company’s assertion that it would open 220 to 235 new restaurants and enjoy an effective full-year tax rate of around 39.0%.

The bad: 2016 will be viewed by investors as a transitional year, and investors might as well throw any valuation metrics out the window in their investment decisions.

The ugly: Chipotle is running the risk of overseeing a neverending and very costly marketing campaign, especially if a correlation between traffic and marketing presents itself.

The ugly-er: After Chipotle’s earnings, management said in its conference call that it will spend $315 million in G&A throughout the year, which will hinder any meaningful earnings per share growth, including forcing the company to expect to merely break even in Q1.

The Missing: No Catalysts … And No Hope for Chipotle Stock

Chipotle’s investors have argued over the past few years that management holds several catalysts that can help boost Chipotle’s stock.

For starters, CMG catering initiative garnered tremendous investor attentionand its growth prospects were expected to boost Chipotle shares.

So … what did management say about its catering initiatives in the most recent quarter?

“Other promotions including a Big Game catering promotion and a digital game called Guac Hunter will also be occurring during this timeframe.”

Nor did we get anything about new restaurant concepts like Pizzeria Locale and ShopHouse Southeast Asian Kitchen.

Bottom Line

The generous consensus among the investment community is that Chipotle’s stock can’t get any worse, and that it’s cheap.

But CMG shares are cheap for a reason: The business was suffering before the E. coli outbreak, and management is banking its future on marketing initiatives with the hopes that traffic will return and stay for good.

Investors are better off investing elsewhere in the restaurant sector. Right now, the Chipotle stock high-growth story is on pause.

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

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