When it comes to the business world, perception can often become reality. The reputations of Valeant Pharmaceuticals (VRX), Chipotle Mexican Grill (CMG) and SeaWorld Entertainment (SEAS) have all taken major hits. Can the companies and the stocks ever recover?
Valeant Pharmaceuticals (VRX)
The SEC is still in the process of figuring out exactly what VRX did and didn’t do. But the damage to the company’s reputation was done long ago. Citron’s Andrew Left called VRX “Enron-esque.” Morgan Stanley called the company a “house of cards.”
Once a company gains such a nefarious reputation for predatory pricing and fudging its books, it’s hard to recover. VRX is off to a good start by giving the boot to controversial long-time CEO Michael Pearson.
VRX has also gotten real with shareholders about the company’s earnings outlook, slashing 2016 guidance aggressively for a second time earlier this month.
Assuming VRX escapes its SEC probe relatively unscathed, the company’s main objective will be to convince the market that it actually does have a viable core business model.
Back in March, board member and investor Bill Ackman said that VRX’s core business is worth “multiples of the current market price.” At the time, VRX’s market cap was $11.4 billion. It now rests at $7.5 billion. With $31 billion in debt, there’s no question VRX needs to improve its reputation in a hurry.
Chipotle Mexican Grill (CMG)
CMG isn’t the first restaurant stock to be hit by a health scare. In fact, Yum! Brands (YUM)’s Taco Bell also suffered an E. coli outbreak back in 2006.
Unfortunately, CMG management turned its health scare bad dream in to an absolute PR nightmare. First of all, CMG’s salmonella, E. coli and norovirus outbreaks occurred over a period of seven months. Instead of a single, isolated incident, the public was repeatedly bombarded with negative CMG headlines.
The first salmonella breakout in Minnesota happened in September of 2015. The E. coli outbreak began with 43 restaurant closures in Washington and Oregon in October. After re-opening the closed restaurants in November, CMG closed a restaurant in Boston due to a norovirus outbreak on December 8.
The company was sued over misleading food safety statements in January. Finally, after co-CEO Steve Ells said on January 13 that he was “extremely confident” the food safety crisis was over, Chipotle once again was forced to close a Boston location due to a norovirus outbreak in March.
The company has launched multiple free burrito promotions in recent months to try to win back customers. Unfortunately, the PR damage from repeated health scares and empty promises from management has already been done.
SEAS has faced a steady stream of negative PR from wildlife activists throughout its entire existence. However, in recent years the company has been rocked by three PR bombshells. First, the 2013 documentary Blackfish focused on SeaWorld’s orca Tilikum, who has been involved with three trainer deaths. The filmmakers believe that Tilikum’s behavior is a manifestation of psychological trauma that the orca has endured while captive.
Just when the most intense PR heat from Blackfish had died down, reports came out earlier this year that Tilikum is dying of a respiratory infection. Several former orca trainers immediately stepped up and said that SEAS has repeatedly lied about Tilikum’s health.
To make matters worse, Walt Disney (DIS)’s new movie Finding Dory, which comes out this weekend, is expected to be a huge blockbuster. The movie’s anti-captivity message is already generating significant social media buzz. SEAS could soon be swimming upstream against a flood of negative publicity once again.
Disclosure: As of this writing, Wayne Duggan had no positions in any of the stocks mentioned.