Chipotle Mexican Grill Is Heading Lower

Buybacks can be a good way to boost shareholder returns, but only if they are done at the correct time. Buybacks can also be more tax efficient than dividends, which is why I generally like companies that buy back shares.

Chipotle Mexican Grill, Inc. (CMG) has spent almost $1 billion buying back shares over the last few months. However, Chipotle Mexican Grill’s buybacks have been destroying shareholder value.

Here's what went wrong

Buybacks are supposed to take advantage of a company’s low share price.
But, in the case of Chipotle Mexican Grill, the company’s management has been using it to prop up the share price to no avail. Despite spending almost a billion on buybacks, shares of Chipotle Mexican Grill have been in a downtrend for almost a year.

Not only have the buybacks been unsuccessful in keeping the share price up, but Chipotle Mexican Grill has also greatly deteriorated its cash and now has only $270 million left.
Chipotle Mexican Grill Is Heading Lower
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To make the matters worse, Chipotle Mexican Grill’s fundamentals have gotten worse throughout the buyback period. The stock is currently trading at 58 times trailing earnings, which is overvalued especially since the company is not growing at a staggering pace anymore.

Buying shares at overvalued levels has destroyed shareholder value as the stock has fallen over 30% since the company initiated the buyback program. In addition, given the aggressive nature of the promotional campaign Chipotle Mexican Grill is running, the money could have been put to better use. Chipotle Mexican Grill’s margins and profits are shrinking at a rapid pace and there’s still no sign of a turnaround.

The company is scheduled to report its quarterly results later this month and analysts are still expecting the company’s sales to drop almost 30% on a year-over-year basis. Despite the huge amount of money Chipotle Mexican Grill has spent on promotions, it has failed to curb the revenue plunge.

What’s worse is that the 30% drop will take into account the sales from newer outlets, which means the company’s same-store sales could fare even worse. As a result, I think investors should still avoid the stock.

Based strictly on the fundamentals, Chipotle Mexican Grill has considerable downside to offer.

Shorting the stock is a viable option

I think Chipotle Mexican Grill is a short heading into earnings. The company’s turnaround initiatives have failed miserably and it has wasted a considerable amount of money on buying back overvalued shares. Moreover, given the fundamentals, I think the stock can easily fall about 20% from current levels, which is why I am reiterating my bearish stance.

Disclosure: No position.
Published on Oct 18, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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