Yet again, Chipotle Mexican Grill, Inc. (NYSE:CMG) is back to the $300-level. Cowen downgraded CMG stock to a “Sell” and slapped a $250 price target on the name.
Cowen’s surveys suggest that Chipotle has yet to recover from its 2015 E. coli crisis, as quality and value perceptions remain low. Cowen also notes that competition is intensifying in the healthy and clean food space, while commenting that CMG’s planned price hikes over the next 2 to 4 quarters seem “imprudent”.
So CMG stock, which had rallied from $300 to $320 over the past couple days, has now plummeted back to $300.
It’s a level Chipotle stock just can’t seem to escape. The stock fell below $300 on Aug. 23. Then it rallied all the way to $320 by Sept. 1, only to fall back just above $300 by Sept. 5. It rallied again from that level to roughly $320 by Sept. 7, and is now falling off a cliff again back to being just above $300.
What does all that mean?
CMG stock might be great for traders.
But it’s not worth a look for long-term investors.
The Chipotle Stock Story Remains Negative
Lets get one thing straight first. CMG stock is not cheap.
It’s actually really expensive, despite all the health scandals. Chipotle stock is trading at 28-times fiscal 2018 earnings estimates. The S&P 500 Index is trading at 16.9-times fiscal 2018 earnings estimates. So the stock is trading at a 66% premium to the market.
Quick service restaurant heavy-weight McDonald’s Corporation (NYSE:MCD) stock trades at 23-times fiscal 2018 earnings estimates. So CMG stock is trading at a 22% premium to MCD stock. Fellow quick service titan Jack in the Box Inc. (NASDAQ:JACK) trades at 18.9-times fiscal 2018 earnings estimates; therefore, the stock is trading at a 48% premium to JACK stock.
Meanwhile, Yum! Brands, Inc. (NYSE:YUM), the owner of household favorite chains like Taco Bell, Pizza Hut and KFC, trades at 24-times fiscal 2018 earnings estimates. No surprise here. Chipotle stock is trading at a 17% premium to YUM stock.
Trading at a healthy premium to the market and the quick-service food giants, CMG stock better have a bunch of growth to back it up.
But it doesn’t.
The food chain continues to find itself at the center of health controversies, and recently received a subpoena relating to the norovirus outbreak at a Virginia location. While one health outbreak can be looked at as a freak accident and played off as bad luck, repeat offenses often don’t get a free pass.
This is especially true when it’s starting to look like Chipotle is at least partly responsible for some of these outbreaks. It appears that a lax sick policy is what caused the most recent norovirus outbreak.
Meanwhile, consumers now have so many more reasonably priced healthy and clean food alternatives out there. The poke craze is very real, so is the whole vegan trend (just look at this chart). Superfood cafes are popping up everywhere.
With so many alternatives, why would consumers go back to a restaurant that can’t escape health controversies?
Bottom Line on CMG Stock
Consumers have very little reason to go back to Chipotle, and that is the bottom line on the stock.
Bulls can pump up the unit growth potential (the company has opened over a 100 restaurants this year), but 2,300 is a pretty big store count. There is definitely room for real estate growth, but such growth may not do much if average restaurant sales remain depressed.
And the only way those average restaurant sales come back up is if consumers go back to stores in waves.
That hasn’t happened. It isn’t happening. And it won’t happen.
So why hold onto CMG stock at these levels when it’s still trading at a premium valuation to peers amid hugely negative value perceptions?
I don’t know. And that’s why I think Chipotle stock will just keep grinding lower.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
