In the latest bit of bad news for shareholders in Chipotle Mexican Grill, Inc. (NYSE:CMG), one of the more prescient and bearish Wall Street analysts covering the name predicts another 50% downside ahead.
The estimable Howard Penney of Hedgeye Risk Management gave Barron’s a fairly wide-ranging interview since the last time we looked at CMG stock. He figures that at $8 in earnings per share over the next 12 months and a price-to-earnings multiple of 25, Chipotle stock is worth no more than $200.
That may be generous. Here’s what Penney told Barron’s:
“They still don’t understand what return on incremental invested capital really means. It’s a broken company. The actions we have seen from management during the E. coli crisis tell us all we need to know about their inability to guide this company. They have displayed immense hubris, admitting wrongdoing only when they absolutely had to. Also, it seems undeterred in efforts to open new units at the same rate as precrisis levels. The 200-plus stores they will open next year will actually destroy shareholder value. Their couponing—buy one, get one free—actually creates more problems. Free food is a drug, and when you stop, consumers don’t come back. One thing management needs to do for the stock price and for overall profitability is to slow down growth. When your average unit volumes have gone down by 20%, your economic model has changed. Chipotle hasn’t adjusted to that new model. At the pace they’re growing, there’s lots of stress on the system. Profits are down, employee turnover is up, people are getting paid less. They can slow growth: Starbucks (NASDAQ:SBUX) is a classic example. Recently, the new CEO of Red Robin Gourmet Burgers (NASDAQ:RRGB) announced she is cutting capital expenditure by 50%-plus. She is deploying capital smartly, adjusting to the restaurant-industry reality of declining customer counts and stress on income levels because health care and rents are going up. People are going to supermarkets or eating at home. Chipotle needs to get rational.”
CMG Stock Is Ugly in More Ways Than One
This is why it’s dangerous to see CMG stock as some kind of big-bounce rebound play like Best Buy Co Inc (NYSE:BBY) was in 2013. It simply looks like it’s asking too much of a restaurant company to overcome a food-borne illness in the age of social media.
As Penney wrote of CMG last year: “Rule No. 1: Don’t make the guest sick. Rule No. 2: Don’t forget rule No. 1.”
Best Buy didn’t have to overcome consumer squeamishness. Food poisoning is nasty. Unkempt stores or a weak e-commerce strategy are nothing compared to associating something revolting with your brand.
Click to Enlarge Given all this, CMG stock is surprisingly pricey. Shares change hands at 43 times forward earnings even as the long-term compound annual growth rate remains negative. The market is betting on a huge spurt of growth soon as same-store sales cut their losses.
Of course that’s been the bull case for CMG for more than a year and same-store sales still haven’t stabilized according to analysts’ expectations.
CMG’s chart isn’t reassuring either. Shares managed to overcome resistance at their 50-day moving average recently but were unable to hold on to the gains. The same key technical level then failed to support the CMG stock price on a downturn.
Chipotle would do well to listen to Howard Penney. The company’s response to its E. coli scandal has in many ways only made matters worse. Don’t expect a rebound here anytime soon.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
