The way Chipotle Mexican Grill, Inc. (CMG) stock trades in the months and years ahead will be an enormously interesting case study for investors sitting on the sidelines. To those who own Chipotle shares, the journey won’t be quite so academic.
CMG stock is transitioning, rapidly and rather unexpectedly, from a go-go growth stock to a more mature company with lower expectations.
Same-store sales growth at the burrito chain, which was once the envy of the industry, posted its first-ever year-over-year decline in the fourth quarter, plunging 14.6% in Q4 2015.
It’s true, investors already expected the worst going into Chipotle’s earnings report Tuesday, but there were several revelations that CMG stock holders didn’t anticipate. Those surprises are the reason the Chipotle stock price is off as much as 7% in early trading.
CMG Revenue Miss, Investigation Expanded
As anyone who’s been even casually following Chipotle knows, the company’s recent woes stem from serious health concerns regarding the company’s food. A multi-state E. coli outbreak began in October and was unceremoniously followed by an outbreak of norovirus that left 140 people sick in Boston.
CMG stock traded cautiously higher on Monday and Tuesday of this week after reports that the Centers for Disease Control and Prevention might be on the verge of ending its investigation into the E. coli issues.
While I knew this was a strong possibility on Monday, I still advised investors to stay away from Chipotle going into earnings. There was simply too much uncertainty about the company’s future. Plus, Chipotle’s stock still commanded a rich valuation, even by pre-outbreak standards.
It appears that caution was well-advised: While Chipotle’s Q4 earnings per share came in at $2.17, far above the $1.85 consensus, CMG logged sales of $997.5 million, 6.8% less than in Q4 2014. Analysts were looking for $1.01 billion, marking the first time ever that sales fell.
And while the Centers for Disease Control and Prevention ended its investigation, an even bigger headache emerged: Chipotle Mexican Grill was served with a subpoena that expands a criminal investigation by the U.S. Attorney for the Central District of California.
At the end of the day, though, the company is still growing at a pretty healthy clip. In 2015, Chipotle opened 229 new restaurants, increasing its store count by 12.9% to 2,010. In the coming year, CMG plans on opening another 220 to 235 locations, expanding its base by 11.3% at the midpoint of that range.
However, if Chipotle can’t reignite some remnants of same-store sales growth — a metric that was a major concern for CMG even before the rash of health concerns dragged shares lower — it will continue to underperform in 2016.
Margins also fell off a cliff, and it’ll take several quarters (if not several years) to get back on track again. Some analysts think it may take as many as four years for a full-fledged margin rebound.
With Chipotle’s stock trading hands at 26 times earnings despite its litany of problems, shares definitely aren’t worth the stretch.
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 firstname.lastname@example.org.
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