Consumers have moved on from Chipotle Mexican Grill, Inc. (NYSE:CMG), and the market is starting to figure that out. At one point in time, CMG was the choice quick service dining destination for consumers of all types. It was healthy, cheap, convenient and it offered a unique “do-it-yourself” ordering style that appealed to customers.
But when the E. coli and norovirus outbreaks hit in late 2015, consumers didn’t really care about how cheap or how convenient Chipotle was. Instead, they questioned the quality of the food and cleanliness of the in-store practices.
It was a damaging hit for a company with a slogan that read “food with integrity”. Customers left in packs.
And unfortunately for CMG stock investors, those customers haven’t really returned. Comparable sales were positive last quarter, but they were still hugely negative on a 2-year basis, implying that while some customers have come back, most haven’t. They left Chipotle in 2015, tried other, newer quick service restaurants, liked those new options and simply haven’t returned.
The restaurant space can be fickle like that.
And now that there is another Chipotle health scandal in the news, it’s highly unlikely that the company ever fully regains its pre-2016 customer base.
That is why CMG stock is trading around $300 for the first time since 2012. Some investors might want to align themselves with famed hedge fund manager Bill Ackman and buy the stock on this dip.
But I’m not one of those guys. I think Chipotle stock still has more room to fall.
Chipotle’s Valuation Doesn’t Make Sense
CMG stock trades at 27.4-times fiscal 2018 earnings estimates. That multiple is about as big as it gets in the established quick service restaurant space.
And quite simply, Chipotle doesn’t deserve that big of a multiple considering its numerous challenges.
Market favorite McDonald’s Corporation (NYSE:MCD) stock trades at 22.9-times fiscal 2018 earnings estimates. That’s a company that has found a sweet-spot in the overlap of health and convenience. It’s on a major comeback. Comparable sales are consistently positive. The MCD growth story has pretty much everything that the Chipotle growth story lacks.
Yet CMG stock trades at a 20% premium to MCD stock.
Meanwhile, Jack in the Box Inc. (NASDAQ:JACK) trades at 20.1-times fiscal 2018 earnings estimates. Comparable sales growth has been bouncing around between positive and negative at JACK, but earnings growth has been strong (+11% year-to-date) despite sluggish top-line trends. In fact, stable earnings growth has been a staple of the JACK growth story for some time now. Since 2013, JACK has grown earnings-per-share around 47% per year.
That isn’t the case with Chipotle, and yet CMG stock trades at a 36% premium to JACK stock.
The other food giant, Yum! Brands, Inc. (NYSE:YUM), trades at 24-times fiscal 2018 earnings estimates. At YUM, Taco Bell and KFC have been on fire, posting consistently positive comp growth, while Pizza Hut has lagged with mild declines in comps. Overall, earnings growth is robust (+21% last quarter) and it is likely to remain that way given a lack of controversy surrounding Taco Bell, KFC and Pizza Hut.
But Chipotle continues to be at the center of food safety controversy. Despite that controversy, CMG stock still trades at a 14% premium to YUM stock.
Elsewhere, El Pollo LoCo Holdings Inc (NASDAQ:LOCO) trades at 16.4-times fiscal 2018 earnings estimates. Sonic Corporation (NASDAQ:SONC) trades at 17.3-times fiscal 2018 earnings estimates. Papa John’s Int’l, Inc. (NASDAQ:PZZA) trades at 23.8-times fiscal 2018 earnings estimates.
In my screening of this sector, the only notable companies with comparable or richer valuations than CMG are Domino’s Pizza, Inc. (NYSE:DPZ), Shake Shack Inc (NYSE:SHAK) and Habit Restaurants Inc (NASDAQ:HABT).
But the DPZ growth story is just incredibly strong thanks to a pick-up in delivery popularity (comps rose 11.2% last quarter while lapping a 9.1% increase). The growth in delivery is only growing thanks to the at-home economy, so DPZ deserves a rich valuation for being a natural winner in this space. It’s unclear whether Chipotle stock will benefit from this delivery surge.
Meanwhile, HABT and SHAK get the rich valuation because their tiny store bases imply huge unit growth potential. Bulls keep saying the same thing about CMG stock, but the truth is that it has more than 2,300 locations, while Habit only has 189 locations and Shake Shack only has 134 locations.
Bottom Line on CMG Stock
Chipotle stock is far too richly valued considering its hazy growth outlook. Comparable sales growth will be tepid at-best as the laps get harder. Unit growth potential isn’t as big as bulls want it to be. Labor and store traffic headwinds mean margins won’t ever get back to pre-E. coli levels.
Despite these operational challenges, CMG stock still trades at a hyper-rich forward valuation.
That doesn’t make sense.
Consumers have moved on from it. So has the market.
And so should you.
As of this writing, Luke Lango was long MCD and DPZ.