Chipotle Mexican Grill's Revival Will Take Months

I was a long-time Chipotle Mexican Grill (CMG) bull, however I recently turned bearish on the stock when the company suffered numerous E. Coli and norovirus outbreaks. My bearish stance has not been profitable as shares of Chipotle have continued appreciating despite the recent incidents.

I strongly believe that investors are underestimating the headwinds as Chipotle is still trading at a high valuation. Given that same-store sales are down considerably and Chipotle’s revenue is also down on a year over year basis, I think Chipotle should be trading somewhere around $400, 20% lower than its current valuation.
However, given the irrational market sentiment, I don’t think investors should short the stock.

Falling comps should force price lower

Chipotle’s same-store sales plunged over 33% in January on a year over year basis. February was also terrible as comps fell over 26%. Given the steep drop in comps, I find Chipotle’s valuation appalling. The stock is still trading at almost 33 times trailing earnings.

Chipotle is still trading at the valuation of a growth stock, however, the recent outbreaks will put negative pressure on its sales for at least a few more months. It’s only a matter of time before reality catches up to the stock price, which is why I think investors should stay away from it for the time being.

However, people have a tendency to forget these incidents in the long-run. Hence, a turnaround is quite possible for Chipotle. While sales and margin will witness a dip in the coming months, I think investors should wait for a better entry point and buy the stock when it falls to around $400.

Chipotle still has loads of room to expand domestically and internationally, which is why I think the company’s long-term prospects are still intact. Hence, I expect the recent weakness to push the stock lower in the coming months, creating the perfect buying opportunity for long-term investors.

Conclusion

Given the weak sales trend, I strongly believe that investors should avoid Chipotle for at least a few more months. I expect the stock to bottom in the last quarter of 2016, which would be the ideal time for long-term investors to buy the stock.

However, as of now, I don’t see Chipotle sustaining its valuation. With a trailing P/E ratio of over 30, Chipotle has plenty of downside to offer and the risk/reward ratio is not favorable. Hence, I think investors should sell the stock and wait for a better entry point.
Published on Mar 17, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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