- Chipotle stock may be closer to a bottom than it appears.
- The road back will still be slow.
- Look for a P/E around 20, for Chipotle to leave the news pages, and for Chipotle stock to rise on a down day.
It is said that you don’t go into a falling stock until there is “blood on the streets,” until the stock has washed out so completely that it can’t possibly fall any further.
By that measure, Chipotle Mexican Grill (NYSE:CMG) is approaching that bottom. Writers here at Amigobulls have been hammering Chipotle stock for months, criticizing its “food with integrity” tag-line and laying out harsh guidelines for investment.
The hits keep coming for the burrito chain that was spun-out of McDonalds (NYSE:MCD) in 2006. Since the middle of October the shares are down by 46% as repeated reports of salmonella, E.Coli and novovirus have betrayed management’s efforts to get ahead of the story. When federal investigators start sniffing around your restaurants things are pretty bad.
Chipotle has taken extraordinary measures, centralizing preparation of some ingredients last month and, while the company believes that fresh produce like cilantro brought the germs into its stores, the chain of events leading to the illnesses remains unclear.
The model for dealing with the crisis has been what happened to Johnson & Johnson (NYSE:JNJ) regarding its Tylenol pain reliever a generation ago. But that problem turned out to be a routine extortion attempt. Such an approach can work if the problem can be isolated, and controlled, but there have now been so many Chipotle scares in so many places – outbreaks have now occurred in the West, in the Northeast and in the Midwest -- that the whole mass market “sustainable food” movement is being called into question.
The store’s comparable store sales numbers, which it reports each month, show an accelerating trend downward – down 16% in November and down 30% for December. Rival fast-casual chains like Panera Bread (NASDAQ:PNRA) have been taking advantage, increasing advertising and taking market share.
So, when and how will Chipotle come back?
First, it won’t happen right away. Even at present levels Chipotle stock has a Price/Earnings multiple near 25 (about the same as McDonald’s) but we know the earnings are going to be very weak for at least the next six months.
Second, it won’t happen quickly. After its crisis, Johnson & Johnson stock price fell by 50% before beginning to recover in 1984. The company didn’t get above its pre-crisis levels until 1986.
But, third, recovery is possible. There are no direct competitors – no other pure-play burrito chains – but other companies that sell burritos aren’t doing well, either. Jack In The Box (NASDAQ:JACK), owner of Qdoba, is down over 20% in the last six months. Competitors like Moe’s Southwest, which is owned by privately-held Focus Brands, and Willy’s Mexicana Grill, also privately-owned, are regional and don’t have the scale to compete directly. But rice and beans represent great food value – profits on burritos should remain handsome as long as food costs remain a concern.
My guess is we’re closer to the bottom than many think, but that you shouldn’t expect a return to $700 for at least a couple of years. You can wait to buy Chipotle stock, in other words, but keep an eye on it. When the stock rises on a down day, or the P/E gets below 20, it may be time to step up.