Is This the Start of Chipotle Mexican Grill's Downfall?

The recent E. coli fiasco has greatly damaged Chipotle Mexican Grill’s (CMG) brand value. For a company that boasts itself on providing healthy fast-food, the recent E. coli breakout will not go down well with investors. What’s worse is there seems to be a new report of a breakout every other week. Chipotle was already struggling due to slowing same-store sales and the breakout has put a huge dent on the brand.

Unsurprisingly, Chipotle’s stock has plummeted considerably since the incidents have come to light. However, investors who are thinking about buying the recent dip should not go ahead with their plans as the stock has a lot more downside.

Chipotle is currently trading at over 30x trailing earnings.
Given the valuation, you’d expect Chipotle to continue posting same-store sales growth. Investors have already priced in great growth in Chipotle’s stock, but the company will struggle due to the breakout.

Not only will Chipotle fail to meet its guidance, same-store sales may even remain depressed throughout 2016. For a company trading at 30x trailing earnings, falling same-store sales is not a good sign for the share price. I am confident that Chipotle will slash its guidance in the near future and will struggle to rebuild its brand value in the coming months. Hence, I think investors should avoid the stock for the foreseeable future and I expect it to dip to $400 in the coming months.

The company does have a lot of room to grow, both internationally and domestically, but traffic at its restaurants will remain depressed due to the recent incidents. It will take a lot of time for Chipotle to recover from the recent fiasco, especially since the reports of the breakout haven’t stopped yet. With so many people still getting infected, traffic at Chipotle will drop significantly, and as a result, the comps will suffer.

Conclusion

Chipotle is, or may be was, a great company. The company does have a lot of room to grow, but the recent outbreak will definitely have a negative impact on the share price in the short-term. I wouldn’t be surprised if Chipotle’s shares fall about 20% over the next 12 months, which is when I would reassess the stock. As of now, I think investors should sell the stock and continue avoiding it till it falls to at least $450, which is highly probable in the present circumstances.
Published on Dec 28, 2015
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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