Does Chipotle Stock Deserve More Long-Term Optimism?

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CMG - Does Chipotle Stock Deserve More Long-Term Optimism?

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Brian Niccol, given credit for the rise of Taco Bell within Yum! Brands (NYSE:YUM), is rolling out similar plans for Chipotle (NYSE:CMG) and analysts aren’t buying it.

CMG stock was due to open at $428, down over 6%, on June 29 after a conference call that was long on aspiration and short on detail.

Niccol’s hiring in February started a rally in CMG stock, the price per share rising from $255 to a recent high of nearly $470. At its current price, investors are paying nearly 3 times revenue for the burrito chain, against four times sales for Yum! That company, however, is consistently profitable and even offers a dividend.

The question is whether Chipotle can replicate that success. Niccol’s track record says it can, but it won’t happen overnight.

CMG: Hope Springs a Leak

The ingredients in Niccol’s plan include new menu items such as quesadillas and milkshakes, more digital ordering and delivery, and a quirky ad campaign that includes sponsoring an eSports team.

The idea is to get in front of young consumers, to deliver what they like when and where they want it, and to build a “lifestyle brand” like Taco Bell.

That’s a huge change for Chipotle, which rose to prominence on quick, all-natural lunch burritos delivered with a cafeteria-style line, a nutritious and filling lunch for office workers costing $10. Niccol says it will now become a full-menu Mexican-style operation with specials during low-traffic day parts.

The key to this change will be the Chipotle app, which is similar to many pizza apps and a new program being launched by McDonalds (NYSE:MCD). The app will have a loyalty program and accept orders for delivery or pick-up.

Niccol did give analysts one thing they wanted, throwing the old management under the bus, claiming they lacked “discipline,” resulting in scandals where people got sick after eating the company’s food. Even today it’s unclear what happened in the 2015 e.coli outbreak, whether it was bad vegetables or bad meat.

Before Niccol joined, CMG had already changed parts of its supply chain to prevent future outbreaks, marinating the salads and pre-mixing the guacamole, for instance. But that risked turning off consumers looking for freshly made food. The crowds that once thronged stores are mostly gone.

How Long a Wait

Chipotle is next due to report earnings July 26, with analysts expecting about $75 million in net income, $2.71-per-share, on revenue of $1.26 billion.

That would represent about 10% top-line growth over the March quarter, albeit with warmer weather that favors Chipotle’s outdoor patio seating. It would also represent 13% more income than during the same time last year. CMG easily beat earnings estimates in that March quarter.

However, it’s hard to see a lot of growth during the quarter that starts in July with the company saying about 60 low-performing stores are due to close.

The Bottom Line on CMG Stock

The problem for many analysts is that Chipotle stock ran up quickly after Niccol’s hiring, and may have gotten ahead of itself. High expectations are already baked-into the shares, evidenced by the earnings estimates for June. Failure to meet those targets could hit the shares hard in the near-term.

My problem with Niccol’s plan is that it is mainly focused on expanding sales through marketing, and not on the supply chain problems that caused Chipotle’s fall in the first place. On the other hand, neither I nor anyone else following the stock has run a restaurant chain. Niccol has, and he’s done well.

If you’re in it, then, I wouldn’t give up on CMG stock. If you’re not, I’d wait to see evidence of a turnaround before jumping in.

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 danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.


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Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2018/06/does-chipotle-stock-deserve-more-long-term-optimism/.

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