After plunging about 45% from its 52-week high, the shares of Chipotle Mexican Grill, Inc. (NYSE:CMG) have shown signs of bottoming — at least since mid-June. So perhaps the worst is over? Or should investors still be wary of CMG stock?
Well, this week we will bring some more clarity on this. Consider that today, Chipotle earnings will come out after the market closes.
Yet Wall Street is far from optimistic. The analysts’ consensus is for Chipotle earnings to come to 90 cents a share with revenues of $1.05 billion. This compares to last year’s EPS (earnings per share) of $4.45 and revenues of $1.2 billion.
OK then, what are some of the worries to keep in mind about the fundamentals? Well, let’s take a look at three:
Awful Perception Problems for Chipotle Stock
Of course, the main issue for CMG stock has been the reports of outbreaks of E. coli and salmonella. As a result, the impact on earnings has been severe. During the latest quarter, the same-restaurant sales plunged a grueling 29.7%. There was also a net loss of 88 cents a share.
But this may not be a temporary problem. Let’s face it, with the power of social media, it is extremely tough for companies to repair a damaged brand. Hey, the motto at CMG is that it serves “food with integrity” and that its menu is health-conscious. So it any wonder that there is dissonance with consumers?
Something else: The issues about E. coli and salmonella occurred over a six-month period. No doubt, this was quite a bit of time to reinforce damage to the CMG brand.
Turnaround Efforts Look Weak
Management at CMG has taken actions to get things back on track. Yet the efforts have been somewhat late — and also weak. First of all, the company plans a new product rollout in the fall of a chorizo offering (this is a spicy chicken and pork sausage).
Next, CMG has recently launched the Chiptopia loyalty program (it will last until the end of September). The offering provides free food for those customers who make repeat visits.
Granted, while this may get some new people to the restaurants, the overall outcome may be a hit to margins. After all, Chiptopia may ultimately be a nice discount for those customers who have remained loyal and are not much concerned.
For the most part, CMG must go beyond marketing gimmicks. Rather, the company needs to show it is taking major steps to improve its safety and procedures. And while this will likely happen, the fact is that the process of regaining trust could take a long time.
For example, this is the opinion of Morgan Stanley’s John Glass. Keep in mind that — according to his own survey of 2,000 people — about 13% of CMG customers do not have plans to return to a Chipotle.
Says Glass: “A full sales recovery to prior peak volumes could take years in our view.”
As a result, he has dropped his price target on Chipotle stock from $500 to $405.
Chipotle Stock’s Valuation
Glass is certainly not the only Wall Street analyst who is dour on CMG stock. Consider that Wedbush analysts have an “underperform” rating and a $400 price target. The main issue for them is the same-restaurant sales.
In fact, according to Zacks, CMG stock has only eight buys. This is in contrast to 13 holds and three sells.
Besides, the valuation on CMG stock is far from cheap, with the forward price-to-earnings ratio of 37X. By comparison, Jack in the Box Inc. (NASDAQ:JACK) trades at 20X and Chuy’s Holdings Inc. (NASDAQ:CHUY) is at 30X.
Oh, and short sellers are also seeing an opportunity for further downside on Chipotle stock. After all, the short interest is a hefty 18% of the overall float.
In all, there are some good reasons to leave Chipotle stock on the table.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.