- Chipotle stock is moving up as the CDC gives the chain the all-clear.
- Chipotle is changing the way it operates to prevent a repeat, but costs could rise.
- Here's why Chipotle is a bet, not an investment right now.
Chipotle Mexican Grill (NYSE:CMG) had a horrible fourth quarter. Everyone knows it. Repeated health scares, the cause for which has still not been isolated, took an enormous toll on the burrito chain’s results.
All you had to do was drive past the nearest outlet and remember what it looked like six months earlier to know this. Where once diners filled the space, now there is often just empty space.
The stock got a huge boost over the weekend, in after-hours trading, as the Centers for Disease Control announced that the outbreak, which impacted 50 units in 9 states, is officially over, and that its investigation is closed.
But even at the $472/share closing price on Monday, down from about $750 a share in August 2015, is Chipotle stock a bargain right now?
Take out the fourth quarter, and you have sales running at $4.8 billion/year. Optimists say that can be achieved again, so let’s assume it is in 2016. With a market cap of $14.3 billion, you’re paying three times sales to own Chipotle stock.
The lazy thing to do is contrast that with the $113 billion market cap and $25.3 billion turnover at McDonalds (NYSE:MCD), from which Chipotle was spun-out a decade ago. Seen this way, Chipotle looks like a relative bargain. The Price/Earnings multiple of 27 looks almost reasonable. It’s almost identical to the 25.7 at McDonald’s.
But before you jump in, consider this. Chipotle restaurants are company-owned. Those at McDonald’s are mostly franchises, and it’s even selling-back some company-owned stores to franchisees. Franchising is, on balance, a better business, with lower risk, than operating a chain. That’s why people do it. A hard working franchisee can make money, and a lot of difficult decisions are taken out of their hands so they can focus on operations. But the bigger profits, and lower risks, are going to the franchisor. Comparing McDonald’s to Chipotle is not an apples-to-apples comparison.
Next, consider the “cure” Chipotle is proposing for its problems. Centralizing the production of key ingredients in Chicago, and shipping them, vacuum-packed, to stores, is going to cost Chipotle money. It’s going to put some of that “Fresh and Wholesome” selling at risk, as customers won’t be watching Chipotle employees chop lettuce any more. The marketing plan needed to regain trust is also going to cost money. And there is no assurance that it’s going to work – the actual cause of the problem has not been pinpointed.
In any case, it might be better to compare Chipotle with Darden Restaurants (NYSE:DRI), which owns and operates Olive Garden and other chain restaurants. Darden has $8.1 billion in market cap and $6.7 billion in revenue. Its Price/Earnings ratio is a modest 8. It’s true that Chipotle has no debt, while Darden has loans on one-quarter of its assets. But can Chipotle really remain debt-free as it installs these new systems and ramps-up advertising?
You’re thinking of buying Chipotle on what you consider a low. You’re betting its glory days will return, quickly, and it will deliver that expected $1.2 billion in revenue each quarter soon.
That is a speculation. It may work out – Chipotle’s managers are top notch. But you’re making a bet, not an investment.