Considering the amount of food consumed on a daily basis, it’s amazing how much Americans take food safety for granted.
Outside of the occasional hole-in-the-wall restaurant being shut down for a day or two by a local health department, Americans don’t even have food safety on their radar.
So when an E. coli outbreak hits a restaurant like Chipotle Mexican Grill, Inc. (CMG) in 14 states, it assaults a cornerstone of daily life.
The Many Problems of Chipotle Stock
Located in mini-malls and other shopping centers, consumers usually have their pick of options besides Chipotle right in the same area. Remember, fear overrides rational thought almost every time. After all, nobody wants to get sick, so the not-so-friendly-anymore neighborhood Chipotle Mexican Grill gets passed by, sending Chipotle revenues down the toilet.
Then another problem arises: Once people migrate to different restaurants, those restaurants become part of the go-to list. New selections turn into discoveries, which in turn become favorites. Opportunistic restaurants may decide to enter the same shopping centers as Chipotle to snatch even more market share away from CMG.
Even worse, CMG stock got hit with bad luck. If it wasn’t enough that same store sales were already down 22% in March, just the hint of a norovirus occurrence in Boston sent sales tumbling down to 27%.
And I haven’t exactly been wowed by the PR response so far. One of the big things the company and its reps must do is get a series of short films produced, all focusing on food safety, from sourcing to plate. Education defeats fear. The company should not only get those films up on websites, and optimize the hell out of them for search, but it should invite journalists to peruse its supply chain and report on what’s going — after triple-checking that everything is performing as it should, of course.
Bottom Line on CMG
What does this mean for Chipotle stock? There’s good news and bad news.
The good news is that with $1.285 billion in cash and investments and zero debt, CMG stock is supported by solid financials. That is a huge relief; one that translates into $43 per share in net cash without bankers breathing down Chipotle’s neck.
But here’s the issue: CMG stock is still valued at 34 times future earnings, meaning the market is pricing it for a huge recovery … in 2018. All it takes is one more health jolt, and the stock gets creamed. There is insane risk here.
That being said, let’s project out to 2020. If nothing else happens, and if customer loyalty returns, Chipotle could return to the growth fast-track.
Maybe CMG grows 20% in 2018 and then returns to its 30%-plus growth rates in 2019 and 2020. It means that over the long-term, you’ll do very well in Chipotle stock.
Now ask yourself whether you want to take that risk.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.