Friday, 11 March 2016 00:00

Where Is Chipotle Mexican Grill Headed?

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Analysis Overview – Chipotle Mexican Grill (NYSE: CMG) has witnessed challenging times in the recent past on E-Coli related illness in restaurants. The stock has corrected by 33% from peak levels, but valuations still remain expensive.

Word Of Praise For Management – Since the E-Coli the management has done exceedingly well towards restoring consumer confidence. From review of the entire supply chain to DNA-based testing of fresh produce and meats to identify harmful bacteria in these ingredients, Chipotle Mexican Grill is doing all it can to ensure that the restaurant chain lives up to its reputation of serving healthy food. But a good company and good management need not always be a good investment.

Comparable Restaurant Sales Trend – The chart below gives the comparable restaurant sales trend for Chipotle Mexican Grill

Chipotle Mexican Grill Comparable Restaurant Sales Trend


The sales trend is for the last eight quarters and it’s clear that comparable restaurant sales growth has gradually softened. The 4Q15 quarter decline is an exception considering the challenges faced.

However, I don’t expect robust comparable restaurant sales through 2016 and the point that I want to make is that CMG is not a high growth stock anymore in terms of sales growth or EPS growth.

According to data available on 4-Traders and Yahoo Finance, Chipotle Mexican Grill is trading at FY16 and FY17 PE of 54.8 and 34.0. For 4Q15, the company’s diluted EPS declined by 43.5% and for FY15, the company’s diluted EPS increased by 6.9%.

Considering an optimistic estimate of 10% EPS increase for FY16, the PEG ratio still indicates that Chipotle Mexican Grill is trading at expensive valuations as compared to the company’s likely EPS growth trajectory.

I don’t want to talk about bearish stock price targets here, but the company’s valuation is a reason to be concerned. In my view, the stock potentially has more downside in the coming quarters. Also, it is important to mention that even with management efforts to restore consumer confidence; the recovery path for Chipotle Mexican Grill is likely to be sluggish.

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