People are starting to go cuckoo for carnitas and bananas for barbacoa again, but the turnaround is taking too long for a notoriously impatient stock market. Shares of Chipotle Mexican Grill (NYSE: CMG) hit another four-year low last week, held back by another wave of bad publicity and a mixed quarterly report.
Chipotle stock seemed poised to bounce back earlier this year, rising in four of the first five months of 2017. It's been mostly downhill since then, as back-to-back monthly declines have resulted in the shares trading lower now year to date.
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These may be rocky times for the former market darling. Comps have risen in back-to-back quarters, but we're still far removed from peak 2015 levels. A norovirus incident at a Virginia location and a viral video of mice scurrying around a Dallas eatery's dining room aren't doing the brand any favors. However, opportunistic investors hoping to nail the bottom on the stock could do a lot worse than take a bite out of the stock these days. Chipotle's turnaround may take longer than bulls were initially expecting, but the payoff for patient stockholders could be substantial.
Reframing the narrative
Last week's second-quarter results were problematic. Earnings landed ahead of analyst expectations, but Chipotle's top line fell short. It's hard to celebrate an 8.1% improvement in comps when it barely makes a dent in the 23.6% slide a year earlier. Profitability may have more than doubled, but net income of $2.32 a share is barely more than half of the $4.45 a share the chain served up during the second quarter of 2015.
Chipotle's stock has shed more than half of its value, but since it's now earning half as much as it did two years ago, it's not as if the earnings multiple is any better. Chipotle began the new trading week fetching 45 times this year's projected earnings of $7.78 a share, only slightly better than the multiple it was commanding two years ago, when it earned $15.10 a share with the stock more than twice as high as it is now. Thankfully for today's risk-tolerant investors, the math should start to get a lot kinder.
As long as the latest food-borne illness remains an isolated episode, the turnaround should continue at a slow yet steady pace beyond July's hiccup. It will take a long time before net margin crosses into the double digits, a level it used to hit for four straight year between 2012 and 2015. Food safety doesn't come cheap, and labor costs will keep inching higher.
The key to believing in Chipotle right now is realizing that the chain continues to get bigger. New units keep opening, with a new Chipotle popping up about every other day, on average. Chipotle's menu keeps expanding, as chorizo, bunuelos, and more recently queso get a shot at boosting check averages. With more locations, we'll see new sales records come well before unit-level sales fully recover. Earnings should now grow faster than revenue. Wall Street doesn't see earnings topping 2015's peak levels until 2020, but if Chipotle shares doubled between now and then, investors would get a pretty sweet return -- with the stock commanding a lower earnings multiple than it does now or did two years ago. The opportunity is there. Chipotle simply needs to execute.
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