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Chipotle Mexican Grill Stock Looks Pricey as Labor Problems Bubble to the Surface

Chipotle Mexican Grill (NYSE:CMG) stock is up more than 35% year to date. The company became the world’s second most valuable fast-food chain by conquering lunch.

a pedestrian walks past a Chipotle (CMG)
Source: Northfoto / Shutterstock.com

The company earned $204 million, $7.18 per share, during the third quarter on revenue of $1.95 billion. Revenue was up 22% from a year earlier, earnings up a whopping 154%. Operating margins at its restaurants were 23.5%.

The market is valuing this performance. Chipotle shares open today at around $1794. That puts the market cap at $50.8 billion, second only to McDonald’s (NYSE:MCD) $189 billion among quick-service restaurant stocks.

Second with a bullet. Chipotle is catching up.

A Closer Look at CMG Stock

CEO Brian Niccol, whom I have boosted since he came on board in 2018, has led CMG stock on a 119% tear over the last three years. Among his weapons have been online ordering, drive-thru lanes and restoring an earlier reputation for fresh, hot, healthy food.

He talks about “leading with love” and about employees “being heard.”

Chipotle has won a special regard from teenagers, who count it alongside Nike (NYSE:NKE) and Snapchat (NASDAQ:SNAP) among their cultural touchstones. To keep that going the company has launched a “creator class” of TikTok influencers to sing its praises online.

Perhaps Niccol’s biggest innovation is the “Chipotlane,” a drive-thru that would have been frowned on under the company’s original leadership team.

It works thanks to Chipotle’s online ordering system, another Niccol innovation. Customers order and pay before they arrive and have food handed to them, speeding the process. Chipotle now gets almost half its revenue through digital orders.

Niccol was recruited to Chipotle after years of scandal that resulted in it paying a $25 million fine for tainted food. He came from the Taco Bell unit of Yum! Brands (NYSE:YUM). Chipotle is now worth $14 billion more than Yum!, which also includes Kentucky Fried Chicken and Pizza Hut.

Trouble Ahead?

Founder Steve Ells, who is now building himself a mansion in New York City, was bounced because Chipotle grew complacent. Niccols’ first move was to move the company’s headquarters, from Denver to Newport Beach, Calif., replacing Ells’ entire regime.

If the remaining Chipotle bears have anything to hold onto, it’s hope that complacency is returning. Some 19 of 23 analysts at Tipranks now tell clients to buy Chipotle stock. One has a price target of $2,600/share. None say sell.

But there may be trouble in paradise. Half the staff at a Kentucky location recently quit mid-shift, protesting low pay and ill-treatment.

Online ordering is reportedly burning out workers nationwide. The scene at a Boston location, where Chipotle had advertised a sale, went viral and not in a good way.

Tight labor markets aren’t unique to Chipotle. The whole industry is suffering. The risks to Chipotle are greater because it draws workers from the same teen pool that made it a viral sensation.

Teens can turn quickly. A location near me in Decatur, Georgia was advertising for workers on its windows recently, bragging about $11/hour pay. That won’t get it done, guys.

The Bottom Line

To save margins, Chipotle is testing chicken recipes. It pulled a smoked brisket option earlier than planned.

Love and listening may get Niccol through the current problems. But that doesn’t make CMG stock a hold forever proposition. Fast food tastes are fickle. So are tastes in fast food stocks.

Chipotle’s price-to-earnings ratio is now at 72, even higher than Amazon.Com (NASDAQ:AMZN).

While I like Chipotle’s management, I suspect the next big move in CMG stock will be down. Hold off your purchase until after there’s clarity on the company’s latest round of trouble. Before you pay for perfection, make sure there are no bugs in it.

On the date of publication, Dana Blankenhorn held a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. Just in time for Halloween he has a collection of COVID-19 stories https://www.amazon.com/Bridget-OFlynn-Virus-COVID-19-Pandemic-ebook/dp/B09K8PSQC8/ at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.

Article printed from InvestorPlace Media, https://investorplace.com/2021/11/cmg-stock-looks-pricey-as-labor-problems-bubble-to-the-surface/.

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