Is the Market Being Too Lenient With Chipotle Mexican Grill?

The market has been far too lenient with Chipotle Mexican Grill (CMG) as the stock continued trading at a rich premium despite reporting disappointing numbers for the past two quarters. Although Chipotle Mexican Grill did lose considerable value over the last few months, the stock is still ridiculously expensive. Moreover, the stock even rallied after it posted poor quarterly results.

Chipotle Mexican Grill reported Q2 EPS of $0.87, missing the estimates by $0.06. On the sales front, the company reported revenue of $998.4M, down -16.8% Y/Y misses by $51.6 million.

Moreover, Chipotle Mexican Grill reported comparable restaurant sales downfall of 23.6% in Q2. Transactions were down 19% as promotional activity accounted for the discrepancy between the two marks. Unsurprisingly, restaurant-level operating margins plunged to 15.5% from 28.0% a year ago due to discounting and new initiatives.

Plan not working

I had lowered my price target for Chipotle Mexican Grill from $400 to $350 before earnings due to weak fundamentals, and there were also signs that the company is going to report a wide miss. Thus, I was surprised to see the stock move up about 10% after the bad results.

However, Chipotle Mexican Grill has now given back most of its post-earnings gain, and I think the downtrend may continue a bit longer. Although it seems that the market values Chipotle Mexican Grill very generously for some reason, at the end of the day fundamentals do matter.

After reporting weak earnings, Chipotle Mexican Grill is now trading at 61x trailing earnings. For this earnings multiple, you’d expect the company to post 30%+ growth for a few years. However, Chipotle Mexican Grill’s revenue is falling consistently, and its initiatives seem to be failing as well.

Moreover, Chipotle Mexican Grill’s comps are considerably lower as well. If this trend continues, which it most probably will, Chipotle Mexican Grill will not be able to sustain its premium valuation for long and will eventually fall to $350.


Even if the market continues overvaluing Chipotle Mexican Grill, I think the stock will likely fall to under $350 on the back of weak numbers. Chipotle Mexican Grill has given back most of its post-earnings gain and is in a downtrend now, which is likely to continue for a few more months.

Given the weak comps and earnings trend, I think investors should keep betting against Chipotle Mexican Grill going forward.

Disclosure: No position

Published on Aug 3, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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