Here we go again.
Just when it looked like struggling fast-casual chain Chipotle Mexican Grill, Inc. (NYSE:CMG) was getting its act together with huge management changes, food safety concerns have struck again. CMG stock lost 4.6% in trading on Wednesday.
According to Business Insider, public health officials are investigating a possible food-borne illness outbreak tied to a Los Angeles Chipotle restaurant. Five reports on iwaspoisoned.com, a crowd-sourced food illness reporting website, claimed that at least seven customers fell ill after eating at a Los Angeles Chipotle location around December 13. According to the reports, the customers suffered from vomiting, diarrhea and nausea.
CMG stock dropped to below $300.
These reports could very well be “fake news” or simply a random coincidence. Chipotle did say in a statement to CNBC that influenza was widespread in California and that these illnesses come against “the backdrop of widespread illness throughout the state”. Maybe it’s just bad luck.
But whether it’s bad luck or not, this incident is yet another major headwind to the CMG stock rebound thesis. Here’s why.
Chipotle’s Brand Will Be Damaged For A While
Investors shouldn’t simply write these illness reports off as “fake news”.
The reports are apparently enough to warrant the involvement of the Los Angeles Health Department’s Acute Communicable Disease Control unit. And that is likely because something very similar happened in July, when multiple illness reports on iwaspoisoned.com related to a CMG location in Virginia turned out to be a norovirus outbreak. That incident was reportedly the result of a manager requiring employees to work while sick.
The reported symptoms this time around are consistent with norovirus (nausea, vomiting, and stomach pain). Chipotle also said in a statement that several employees at the Los Angeles location currently under investigation have been ill.
I’m not at all saying that these illnesses are anymore than a random coincidence. But I’m also not saying that they are a random coincidence. All I am saying is that investors shouldn’t blatantly dismiss these reports as “fake news”.
Secondly, regardless of how this situation plays out, the damage is already done to Chipotle’s brand.
Ever since a 2015 E. coli breakout significantly damaged that brand, CMG has been on close watch by both consumers and investors. Time and time again, while under the microscope, CMG has failed to convey itself to the public as a safe place to eat. Whether it’s norovirus outbreaks or rats crawling around restaurants, CMG seems to be in the news every few months for a food safety issue.
Safety Concerns Are Holding Back Stock
The reality is that CMG stock will not rebound until Chipotle food safety concerns stop popping up in the news.
Don’t believe me? Prior to the July Virginia norovirus outbreak, CMG stock was trading around $400. Third-quarter numbers showed that the outbreak did have an adverse effect on sales. Comparable sales rose just 1% in Q3, versus 8% in Q2. Meanwhile, the full-year comparable sales guide fell from high single-digit growth in Q2 to 6.5% in Q3.
Consequently, CMG stock fell. It’s now a $300 stock.
This trend of CMG stock dropping on weaker-than-expected numbers will continue so long as the Chipotle brand is damaged by persistent food safety concerns.
Bottom Line on CMG Stock
There is no reason to own this troubled stock. It’s in a clear downtrend, still trades at 45x this year’s earnings estimate, and the company can’t seem to move past the headwind which has crushed shares over the past two years.
Thus, even at these multi-year lows, CMG stock is a sell.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
