Following a another round of food safety issues, this time an outbreak of norovirus and reports of mice in a restaurant, shares of fast-casual chain Chipotle Mexican Grill (NYSE: CMG) have plunged to a new multiyear low. Even the disastrous outbreaks of 2015, which led to a 20% drop in comparable sales last year, didn't bring the stock down this far. Shares of Chipotle have tumbled 35% over the past few months, and are now down 57% from their all-time high.
"You want to be greedy when others are fearful. You want to be fearful when others are greedy," according to billionaire investor Warren Buffett. When it comes to Chipotle, fear has certainly taken over. This begs the question: Should opportunistic investors buy Chipotle stock at what looks like the worst possible time? After years of being one of the hottest growth stocks, is Chipotle finally a value stock?
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Getting cheaper every day, but still not cheap enough
Prior to the food safety crisis of 2015, Chipotle stock sported an extremely optimistic valuation. The company earned $15.10 per share in 2015, putting the price-to-earnings (P/E) ratio at Chipotle's all-time high -- roughly 50. Profitability in that year was stellar, with the company managing an operating margin of 17%. For a restaurant chain that doesn't franchise, that's an incredible result.
The double-digit comparable-sales drop in 2016 brought margins down with it. Chipotle produced just $0.77 in per-share earnings last year, essentially breaking even as it hurled promotion after promotion at customers, desperate for them to return to its restaurants. Marketing spending soared and remains elevated today. I doubt the company will ever be able to return to pre-crisis levels of marketing spending.
Results will be better this year, with Chipotle expecting to produce comparable-sales growth in the high single digits. Sales will still be far below peak levels, and it will take multiple years of strong growth to fully recover. But this rebound is the first step. New menu items -- like chorizo that launched late last year and a queso dip that's being rolled out presently -- should help compel some customers to give Chipotle another try.
On a personal note, I've tried Chipotle's queso, and I think investors should be careful to avoid becoming overly optimistic that a single menu item will fix the company's sales problem. My Chipotle queso review: A gritty cheese sludge not worth the price of admission.
Chipotle stock now trades for around $320, down from an all-time high of around $750. Analysts expect Chipotle to produce $7.73 in per-share earnings this year, growing to $11.04 in 2018. That puts Chipotle's forward P/E ratio at 41 based on the 2017 estimate, and at 29 based on the 2018 estimate.
The stock is certainly less expensive than it was during the company's heyday, but calling Chipotle a value stock is quite a stretch. One data point to back this up: Reuters recently found that of 387 mutual funds that own shares of Chipotle, just seven bill themselves as value funds. Chipotle stock is currently in purgatory, no longer a growth stock with clearly defined potential, but still far from being a true value stock.
Can buying Chipotle today lead to acceptable long-term returns? Sure. I expect the company to eventually recover from this food safety mess, but I have serious doubts that its margins will ever rise to pre-crisis levels. Spending, on both marketing and measures to prevent more food safety issues, is likely to remain elevated, and competition in the fast-casual space has only gotten more intense. Chipotle risks becoming a "normal" restaurant chain, which doesn't deserve a premium valuation.
Even after an epic decline, Chipotle stock is still far from cheap. Value investors should look elsewhere for now.
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