Chipotle Mexican Grill, Inc. (CMG) execs are ready for a new year. Owners of CMG stock, too, are anxious to see things back to normal.
“Normally,” Chipotle stock is a top-ranked, market-spanking restaurant play. Since its initial public offering in February 2006, nary a name has outperformed CMG shares, which advanced 1,028% (that’s including the nearly 40% selloff from its 52-week high).
That puts the stock in elite company; some of the hottest stocks of the past decade have significantly underperformed in comparison:
With the burrito-maker set to report fourth-quarter 2015 earnings after the bell on Tuesday, the question burns in investors’ minds: Is CMG stock still a buy, or is its meteoric run finally over?
CMG: Managed Q4 Earnings Expectations
Expectations are half the game when it comes to earnings, and the good news with CMG is that Wall Street has muted expectations for fourth-quarter numbers.
This is one of the most pivotal earnings reports Chipotle has ever had, although Q1 2016 will likely take the cake as the most important in the company’s young history. That’s because CMG suffered a potentially traumatic hit to its brand last quarter as an E. coli outbreak that began in October ended up getting more than 50 people in nine states sick, followed by a norovirus outbreak at a Chipotle location in Boston sickened 140 people.
That, understandably, has had a massive impact on what investors expect from CMG stock in Q4. The company itself has already told markets that it expects same-store sales to crater 14.6% in the fourth quarter, down from previous guidance for an 8% to 11% drop. You can bet that analysts will be anxious to hear what Chipotle is guiding for on that metric going forward.
Wall Street expects CMG to earn $1.86 per share on revenue of $1.01 billion. That represents an earnings decline of 52% and a revenue slump of 5.8% year-over-year.
Chipotle Stock: Still Not Compelling
Chipotle stock is rallying Monday, up more than 4% in early trading after reports that the Center for Disease Control and Prevention may declare Chipotle’s E. coli outbreak officially over. That’s caused some analysts to cautiously raise price targets, and before earnings, it’s a narrative investors like to see.
Still, I’m troubled by the elephant in the room: Investigations into the source of the contamination have turned up nothing. We still don’t know how this happened. And if we don’t know how it happened, we can’t learn from it.
Chipotle shares were richly priced before the recent selloff, and surprisingly they remain expensive today, going for 27 times earnings and 35 times forward earnings.
On top of that, Chipotle’s rising cost of labor will provide serious earnings growth headwinds going forward, and at a certain point its growth rate will materially decelerate. Chipotle, which has posted 20%-plus revenue growth in three of the last four fiscal years, may never see revenue growth top 15% again.
Tread cautiously before Tuesday’s earnings. Sure, there may be a short-term pop if management says something great on the earnings call. But at these levels, shares simply aren’t worth buying.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
