Chipotle Mexican Grill, Inc. (NYSE:CMG) reported its second-quarter earnings after the market closed Tuesday, July 25, and amid a month of several disappointments, at least on one front, the burrito-slinger finally lived up to expectations. A bottom-line beat (admittedly amid a top-line miss) has CMG stock up 3% in after-hours trade.
The late betting by investors heading into the report was that Chipotle would top expectations, with shares rising more than 2% before Tuesday’s closing bell.
Ever since a health scare sickened Chipotle stock in 2015, the company has been fighting an uphill battle to regain its reputation for delivering fast, healthy food. That fight took a turn for the worse this month after a pair of health-related flare-ups that have driven doubt back into CMG stock.
What investors have seen is that shares that once sold for almost $750 each are now down near $340, which looks like a bargain.
Still, Chipotle is on Wall Street’s good side Tuesday evening, reporting $66.7 million in earnings ($2.32 per share) on revenues of $1.17 billion. While the top line was $20 million short of analyst estimates, the top line was enough to climb over expectations of $2.16 per share.
So why is it still so hard to think well of Chipotle stock at the moment?
The Problem of Sickness
The short-term fixes — closing the Virginia unit to sanitize it and closing off the rodents’ entry point in Dallas — are not nearly so troubling as reports that some employers are being told to work while sick. That’s a condition that could easily lead to more trouble for customers.
While it had been nearly two years since the previous outbreaks, customers may not yet be ready to cut Chipotle any slack. Claims of illness are nine times higher at Chipotle restaurants than at other chains and, worse, they have recently gone higher than they were at the height of the 2015 problems, even though the problems now are less serious.
There is a rule of thumb that most stocks can come back 18 months after a scandal. Will the latest cases reset the clock on CMG stock, meaning investors wait until 2019 to swoop in? Will it take less time now, given that this problem looks less severe? Or could this kill the brand entirely, given that it makes Chipotle seem like a second-time offender?
Well, there’s another problem.
CMG Stock Is Too Darn High
At its present price, shares still are too expensive. Consider that Chipotle shares presently sell for about 2.5 times annual sales, and its price-to-earnings ratio is still an eye-popping 105.
At the same time, operating cash flow for the March quarter was below that of the previous three quarters.
You can have that, or behind Door No. 1, we have McDonald’s Corporation (NYSE:MCD), which sports a P/E of 28, a price to sales ratio of about 5, and an actual dividend paying 2.4%, despite the fact that the stock is up 31% so far this year — including a nearly 5% leap on another seemingly unthinkable strong quarter.
Consider, too, that McDonald’s is mostly a franchised operation, with plans to sell the rest of its company-owned stores, because franchisors get fatter profit than franchisees without the headaches of operation.
CMG’s company-owned stores, in fact, stand contrary to the industry’s trends, which are going decidedly in McDonald’s way. The recent success behind Door No. 2, 3G’s Restaurant Brands International Inc (NYSE:QSR) is down to re-franchising. Behind Door No. 3, Wendys Co (NASDAQ:WEN) has been re-franchising for years. Smaller chains, like La Madeleine, a bakery café, are also going the re-franchising route.
With Chipotle, you have a company that is out of step with industry trends, stuck in a cycle of repeated scandals, and selling for an earnings multiple that looks high even if it meets earnings estimates.
CMG stock doesn’t sound like a buy to me.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in QSR.