Things Are About to Get Ugly for Chipotle Mexican Grill

I have been very bearish on Chipotle Mexican Grill (CMG) over the last few months and have recommended investors to short the stock multiple times at different prices. My bearish stance has resulted in over 30% profits in roughly six months.

Going forward, I expect Chipotle Mexican Grill to continue heading lower. That being said, I think Chipotle Mexican Grill is a good company and long-term investors should closely follow the stock as I believe it will bottom in the next few months. Shorting the stock now doesn’t have a lot of safety margin, but investors with appetite for risk can consider buying put options.

In my opinion, Chipotle Mexican Grill is a sell and the stock could see $350 soon enough.
The company is expected to report its quarterly earnings next month and I expect the numbers to be ugly. A terrible quarter will further weigh in on Chipotle Mexican Grill as the stock is already very expensive, despite the 50% drop in value.

Estimates

According to Yahoo! Finance, analysts are expecting Chipotle Mexican Grill’s revenue to dip 12% year over year to $1.06 billion. On the earnings front, analysts are modeling for an EPS of $0.94, which is considerably lower than last year’s EPS of $4.45, especially when you take into account the massive amount of recent share buybacks.

The chances of Chipotle Mexican Grill reporting worse-than-expected numbers are high, which is why I am still bearish on the stock.

Slowdown in the restaurant industry

Fast-food restaurant visits have grown at a quarterly rate of 2% since September of last year 2015. But the Wall Street Journal recently stated that the visits didn't grow at all in the quarter ended in May.

Given that Chipotle Mexican Grill’s sales are already in a downtrend, the slowdown in overall industry does not bode well for the company. Not to forget, Chipotle Mexican Grill stopped reporting monthly comps sales since April. The company had promised to be transparent throughout the E.coli breakout, but changed its stance within a few months.

The sudden decision to not disclose the monthly comps seems a bit fishy to me. This tells me that Chipotle Mexican Grill’s comps dipped worse than they did during the first three months on the year. With WSJ reporting that the entire sector witnessed a slowdown and Chipotle Mexican Grill not sharing its monthly comps for the last three months, the chances of the company reporting ugly numbers are high.

Thus, I expect the stock to lose more value in the coming months and would recommend investors to sell the stock and wait for a better entry point.
Published on Jun 29, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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