The Death (And Rebirth?) Of Chipotle Mexican Grill
Investment U | Dec 07, 2016 02:24AM ET
December marks the one-year anniversary of Chipotle Mexican Grill Inc (NYSE:CMG) founder Steve Ells’ highly publicized apology...
As you probably remember, an estimated 491 people became seriously ill after eating at Chipotle locations across America.
Ells issued his mea culpa five months after the first outbreak was reported. In that time, there were five outbreaks of salmonella, norovirus and two separate strains of E. coli.
Had these outbreaks been linked to McDonald’s Corporation (NYSE:MCD), it’s unlikely they would have sparked the same level of public uproar. But since Chipotle’s brand is built on a healthy, antibiotic-free, local-farm-supporting product, the plague of foodborne illnesses left a bitter aftertaste.
It all came down to a betrayal of trust. By the time Ells apologized, the damage had already been done.
For most of his former fans, it was a case of “too little, too late.”
Customers abandoned the once-bustling fast food joints... and shareholders fled with them. Chipotle became one of the great market tragedies of recent history.
In August of 2015, shares were trading for $757.77 a pop.
By January, they had plummeted to $404.26.
This crisis has depleted a stunning $11 billion of Chipotle’s market value. And if major restaurant analyst Howard Penney’s forecast proves true, Chipotle will fall another 50% in the coming months.
This is hardly a contrarian opinion. According to FactSet, the vast majority of analysts have stamped Chipotle with a “Hold” or “Sell” rating.
To say investors are bearish about the company’s future is a gross understatement. And no one understands this better than Chipotle itself. It’s rolling out new menu options and free food offers to entice customers at every opportunity.
Unfortunately, the company’s recent Q3 earnings report did little to reassure shareholders.
If anything, it confirmed their worst fears.
Revenue was down 14.8% year over year. And same-store sales were off 21.9%.
But the biggest disappointment?
Chipotle made a profit of $7.8 million last quarter. A 95% drop compared to the same period last year.
When a company finds itself with such dire stats, it’s tempting to write them off. But if you ignore Chipotle now, you could miss out on huge gains later on.
Get The News You Want
Sound far-fetched? Consider Jack In The Box Inc (NASDAQ:JACK).
Its 1993 E. coli outbreak makes Chipotle’s situation look like a cakewalk... 178 customers were left with permanent kidney and brain damage... and four children died.
Many analysts thought Jack in the Box was done for. But they couldn’t have been more wrong.
As I write, Jack in the Box is trading at more than $100 per share.
If you had bought shares of Jack in the Box a year after the outbreak, when the price hovered around $2.50, you would have made a huge profit. We’re talking about an almost unfathomable 3,900% gain.
Sure, this example is built on holding one equity for 22 years, which may seem unreasonable to many investors. But even if you had sold your shares just five years into Jack in the Box’s resurgence, you would have quintupled your money.
Chipotle could make a comeback, too. Its revenue data reveals a company on the cusp of recovery.
Is now the right time to invest in Chipotle? It’s too early to say. The next couple of earnings releases could be crucial to the stock’s overall success. In the meantime, Chipotle’s share price could drop even lower.
At this point, we can say only this: the company is well worth watching in the months ahead.
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