Should You Buy Chipotle (CMG) Stock To Avoid Trade War Woes?
Zacks Investment Research | Apr 03, 2018 11:47PM ET
Shares of Chipotle Mexican Grill (NYSE:CMG) surged more than 1.2% in early morning trading Wednesday, making it one of the few glimmers of hope amid market-wide selling—inspired, in large part, by heightened concerns about a trade war between the U.S. and China.
Trade war fears got very real on Wednesday after Chinese regulators announced additional tariffs on 106 U.S. products, or up to $50 billion worth of goods. The country’s new 25% levy on American imports will impact soybeans, cars, whiskey, and a number of other economic staples.
China’s move comes less than a day after President Donald Trump released a list of Chinese imports that his administration plans to target as part of a proposed crackdown on what it deems to be unfair trade practices. Sectors impacted by Trump’s tariffs would include IT and communication technology, robotics, and aerospace.
All 11 sectors of the S&P 500 were in negative territory early Wednesday morning following reports of these trade war maneuvers. However, companies like Chipotle—which famously sources its ingredients locally and is therefore less exposed to international tariffs—might stand to benefit as investors look to move away from heavily-trade-exposed segments of the economy.
But is this embattled stock actually a smart pick right now? Let’s take a closer look.
Valuation
Chipotle shares are currently trading at about 35.7x forward 12-month earnings. That might look cheap considering CMG has traded as high as 51.7x within the past year, but it is actually above the stock’s median 52-week Forward P/E of 35.1. What’s more, Chipotle is trading at a significant premium compared to the broader restaurant market:
Chipotle might be less exposed to the potential trade war, but the stock is still more expensive than its peers—including companies like Brinker International (NYSE:EAT) , Bloomin Brands (NASDAQ:BLMN) , and Darden Restaurants (NYSE:DRI) , which are also likely to be less affected by tariff issues. Investors scooping up CMG shares right now must seriously consider whether the stock warrants this premium.
Outlook
Another thing to consider is that Chipotle’s analyst outlook has deteriorated substantially over the past few months. In fact, within the past 60 days, the company has witnessed 15 revisions to its current fiscal year earnings estimates, with 100% agreement to the downside. The Zacks Consensus Estimate for Chipotle’s annual earnings has slipped $1.69 over that timeframe.
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Our proven Zacks Rank model places an emphasis on earnings estimates and estimate revisions, so this negative activity has earned CMG a Zacks Rank #4 (Sell).
Possible Upsides
While Chipotle’s sluggish earnings outlook and questionable valuation present concerns, the stock does have some upside that might interest investors. First of all, it is still an interesting growth option as the company looks to recover from food safety concerns, and despite negative revisions, our consensus estimates are calling for Chipotle to witness EPS growth of 25% and revenue growth of 8% this fiscal year.
Meanwhile, the company has undergone a significant transformation in terms of its management team recently, bringing on former Taco Bell chief Brian Niccol as its new CEO. Niccol has already shown signs that he will use his experience at the fast-food taco chain to his advantage, adding Chris Brandt, who led marketing efforts at Taco Bell for years, as the company’s new chief marketing officer.
These positive trends might be enough to inspire some investors, especially considering that Chipotle is likely less exposed to the possible trade war that is dominating headlines.
Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!
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