Many investors are running to Chipotle Mexican Grill, Inc. (CMG) stock now that the worst from its E. coli breakout seems to be behind it. However, a CNBC survey found that 50% of people stopped eating at Chipotle following the E. coli news.
Given this news, it is quite puzzling how CMG stock has recovered from lows under $400 to surpass $500 for a while over the last two months. It leads me to believe that investors are looking more at stock price, and not at operating performance and valuation.
Fact is if investors were looking at valuation and growth, they’d realize that even pricey securities like Starbucks Corporation (SBUX) stock are superior to CMG.
In fact, if you are going to buy one or the other right now, you might want to go with Starbucks stock.
Why Buy CMG?
Since Chipotle’s E. coli outbreaks (not to mention norovirus), CMG went from a company with high single digit or low double digit comparable sales growth to one with significant losses. In January and February Chipotle’s comparable sales fell 36.4% and 26.1%, respectively.
In recent weeks, CMG stock had illustrated quite a bit of momentum, presumably because investors believe the worst has passed, and that CMG will be back at positive growth in no time at all. Unfortunately for those optimistic thinkers, CMG announced in a recent 8-k that comps fell 21.5% during the first week of March and 27.3% in the second week — the same week that a Chipotle location was closed for a day over norovirus cases among workers.
Clearly, CMG is a long ways from positive territory, a fact that is also evident in the results from CNBC‘s survey; people are not eating at Chipotle in response to the E. coli and norovirus outbreaks.
With these things considered, CMG will be lucky if it returns to growth at any point in 2016, and it could be a long time before it matches the record performance of 2015. Also, because CMG had to launch a massive investigation and close stores — not to mention the slowing traffic and the higher expenses associated with the E. coli and norovirus issues — its earnings per share has also been lowered in a big way.
Back in December, analysts were expecting CMG to earn $17 per share in 2016, but now, its EPS outlook has been reduced to just $8.16. That means CMG stock is trading at a whopping 59 times fiscal year 2016 EPS, which is incredibly expensive. Furthermore, if CMG is successful in earning the near-$15 per share that analysts expect next year, which I highly doubt, then you would still be paying a far-too-rich 33x FY2017 EPS.
A Far Better Option — Starbucks Stock
In retrospect, CMG stock is still priced as a hyper growth company, and it is currently anything but that. Therefore, I conclude that there is no current value in CMG stock, and if you are one of the many who are price performance obsessed, and believe there must be long-term value due to the declines in its price, then just go with Starbucks stock instead.
With SBUX stock, you will get the growth that is remembered in CMG. During SBUX’s last quarter, comp sales grew 8% globally, and while CMG appears to be getting worse, Starbucks and SBUX stock appears to be getting better.
Not only did Starbucks’s comp sales increase as the year progressed in 2015, but analysts foresee growth of more than 12% this year. Furthermore, Starbucks has consistently been a margin growth story.
In exchange for this rapid, consistent growth and a dividend that continues to rise, investors will pay about 31x this year’s EPS for Starbucks stock, or less than 27x next year’s EPS for SBUX stock.
In other words, you can get Starbucks stock for less than CMG stock, and with all the growth and performance that CMG bulls want.
Is it even a debate, or a question? If you are considering CMG, take a look at Starbucks stock first.
As of this writing, Brian Nichols did not own shares in any of the aforementioned stocks.
