Will Chipotle's Recent Turn-Around Make It A Wall Street Darling Again?

Chipotle's stock started falling, dropping to a low of under $250 a share in February of this year. Since then, shares have bounced back, currently trading at around $434 per share. Still, the stock's value is a long way from its former heights. Can Chipotle recover from its tainted recent history and regain its former, hallowed status?

In early 2015, Chipotle's shares were trading at a premium. It's strong revenue acceleration, impressive comparable store sales growth, and speculation that the restaurant chain would continue leading the pack when it came to fast-casual dining were all positive catalysts. As Forbes put it at that time, consumer sentiment in the US had shifted to wanting "organic and healthier" options, and Chipotle, which bills itself as the place for "real" food free from all the junk, fit that bill.

Then things started going wrong. High profile publications like the New York Times began reporting on how unhealthy Chipotle's food was, causing consumers to pay closer attention. And indeed, thousands of calories and high levels of saturated fat and salt did not a healthy meal make.

Soon after, the company was hit with a class-action suit regarding its claims of never allowing GMOs into its ingredient list. Instead, it turned out that Chipotle sourced its meat from suppliers that regularly used GMO feed.

By far the most damaging event however, occurred during August 2015 when 234 customers contracted norovirus after eating at Chipotle in Simi Valley, CA. Also in August and September, 64 people got salmonella after eating at Chipotle's in Minnesota. Beginning in October 2015, 60 people across 14 different states suffered from e. coli after eating at Chipotle. Finally, in December 2015, approximately 140 people reported suffering from norovirus after eating at a Boston-area restaurant.

Chipotle's reputation took a direct hit. By the end of 2015, the stock had plummeted, dropping below $480, even though the company took steps to improve food safety training and closed a number of branches.

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As a result, Chipotle's quarterly reports in 2016 were less than stellar. In its Q1, Chipotle reported that comparable sales had declined 29.7%. In Q2 they fell 23.6%, and in Q3, they slipped by 21.9%.

The company, as well as investors, hoped that 2017 would be the year things turned around. Chipotle made a concerted effort to win back customers by giving away millions of dollars in free-food incentives. Unfortunately, in July 2017, a number of people reported getting sick after eating at a Virginia-area Chipotle. Once again shares tumbled.

Finally, in November 2017, Chipotle announced that it was replacing its founder and CEO, Steve Ellis.

By February 2018, Chipotle's shares had cratered, after it posted fourth quarter earnings, and forecast further declines in traffic. Following this report, a number of analysts downgraded the stock, pressuring shares further. The stock slipped below $250 a share.

At the same time however, in February 2018, Chipotle announced that Brian Niccol, former Taco Bell chief, would come on board as CEO on March 5th, 2018. Wall Street saw this as a positive move. Indeed, since his appointment, Niccol has made a number of beneficial changes.

He's increased prices, opened new restaurants, focused on bettering the customer experience and improved digital operations. All this fostered a 2018 Q1 revenue bump of 4.9% which in turn sent Chipotle's stock price soaring. Shares jumped more than 24% in April of this year.

More positive news followed in its Q2 . Chipotle beat earnings estimates and reported that its bottom line grew 23.7% compared to the same time last year. Even better, it grew it's comparable restaurant sales by 3.3%.

What's more, as of this writing, Chipotle's price-to-earnings ratio is 74.10, below the industry average of 84.43. Additionally, Yahoo Finance analysts give it a one-year price target of $466.63 per share. Though that's not much more than where it's currently trading, it does show they believe Chipotle is headed in a positive direction.

Still, there are some negatives. Though Chipotle has focused on fixing its food-related woes, in July of this year, hundreds of customers got sick after eating at an Ohio-area restaurant. When the news broke, shares fell more than 6%.

Following the Ohio outbreak, Chipotle announced that it would retrain all of its workers on food safety. This didn't seem to satisfy investors though. Since August, shares have continued trending lower overall.

As well, this food contamination issue is a conundrum for the company. Fresh food, though more appealing as a concept, is also more likely to make diners sick.

Processed food goes through a "kill step" according to QSR . It's cooked at high temperatures that effectively destroy most bacteria. Fresh food, on the other hand, doesn't always go through this—think lettuce, fresh tomatoes or other ingredients that are never heated. As a result, fresh food is more likely to have bacteria on it, which naturally leads to a higher number of food issues.

Since one of Chipotle's biggest selling points is fresh ingredients, contamination will likely continue to be a problem.

Bottom Line

Over the past months, Chipotle has made positive strides towards returning to its former Wall Street darling status. It's working hard to regain customers and instill confidence in its menu.

However, the nature of Chipotle's fare lends itself to increased food-related illnesses, and this will likely continue to be a problem going forward. And because Chipotle's stock reacts so strongly to reports of food borne issues, there's no way to accurately say what will happen over the next few years.

As such, we believe that though Chipotle has made positive strides in 2018, there's still significant risk to purchasing its stock, and not enough upside to justify this risk. We see Chipotle stock as a buy, but only for investors comfortable with extremely risky stocks, who believe CMG will ultimately outpace analyst estimates.

Written By: Investing.com