Back in November analysts were telling investors to sell Chipotle Mexican Grill, Inc. (NYSE:CMG), but hedge fund manager Bill Ackman of Pershing Square Capital Management disagreed with the CMG stock naysayers.
Ackman, fresh off his humiliating losses with Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and his short on Herbalife Ltd. (NYSE:HLF), reported that he’d bought over 10% of the burrito chain, having acquired the stake in Chipotle stock in September .
If he got in at that month’s lows, he’s up 13%.
The company’s financial reports do not yet show a turnaround, with the company marginally profitable after losing about 15% of its business to a 2015 E. coli scare, but investors are starting to nibble on CMG stock. That is nothing like the $748 per share it was worth in August 2015, but well off the lows of $370 per share from last November.
Is it safe to buy Chipotle stock again?
The Bull Case on for CMG Stock
There is a growing bull case around Chipotle stock.
It usually takes about 18 months for a restaurant to recover from a health scare, and we are now 18 months away from CMG’s problems.
Chipotle has been doing the operational things that you’re supposed to do in these situations, there has been no second scare, and it recently launched a new “as real as it gets” ad campaign, in which comedians pretend that the inside of a burrito is a reality TV show.
The ads highlight a claim by CMG stock CEO Steve Ells that his food is free of artificial ingredients as opposed to that of, say, McDonald’s Corporation (NYSE:MCD). After capturing Chipotle customers during the scare, other chains had sought to keep them with claims of healthier ingredients.
One of the companies playing the feud with Ells, Panera Bread Co (NASDAQ:PNRA), recently took a buyout to go private from the same Germans who now own Krispy Kreme, Einstein Bagels and Keurig, among other coffee operations, and this could help Chipotle stock come back.
CMG next reports earnings on April 25 and analysts are expecting earnings of $1.31 per share on revenues of $1.03 billion. That may sound huge for Chipotle stock, but the company only has about 28 million shares outstanding, so it’s about $42 million in profit, and the top line is no bigger than it was last quarter.
That would give CMG stock a forward price-to-earnings multiple of 90. The company’s goal is to bring 10% of revenues to the bottom line by the end of the year, which would be a P/E of about 40. That happens to be the forward P/E the Germans paid for Panera.
The hope is that if the company can perform according to its plans, it will soon be worth buying.
Chipotle Stock Has a Long, Long Way to Go
While speculative darlings like Chipotle stock can come back, they seldom reach their heights.
In the middle of 2015, CMG stock was worth almost $21 billion, which was 4.5 times its top sales mark of $4.5 billion. Even today’s market cap of $13.2 billion represents more than three times its 2016 sales volume. By comparison Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL), which is worth $3.75 billion, is trading near its all-time high, and has a record of continuous dividends going back to 2003, had 2016 sales of $2.9 billion.
Chipotle’s managers need the stock to reach $650 per share, and hold that level for 60 days, if they want to get the full stock awards they are signed up for. Getting there will take some top-line growth alongside the margin expansion Ells has promised, and that is going to take capital he’s now putting into the ad campaign.
CMG has begun opening new stores and has opened a hamburger chain, trying to show its system works in other formats. It also won’t have to pay its complaining workers overtime, having won a lawsuit on overtime pay by showing that each complaining worker’s situation was slightly different.
But big ad budgets, angry workers and greedy management do not make for a healthy financial meal. My guess is that, while Ackman may book a profit here, it’s not going to be anything like the one Chipotle management is promising him. Or you.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.
