Chipotle Stock: Time to Bail on Chipotle Mexican Grill, Inc.?

Chipotle StockChipotle Mexican Grill, Inc. (NYSE:CMG) shareholders are holding their breath today. Just when it seemed that the worst was behind them after suffering a string of foodborne illness issues, Chipotle closed a Boston area restaurant after four of its employees were diagnosed with norovirus. No customer illnesses have been reported yet, but Chipotle stock is down almost six-percent intraday Wednesday on the news.

This latest report comes after a series of E. coli and nororvirus outbreaks left several dozen customers sick towards the end of last year, decimating sales and CMG stock.

In its most recent earnings report, Chipotle reported that same-store sales declined 14.6% in the fourth quarter of 2015, which is the period in which the outbreak first hit. (Source: “Chipotle Mexican Grill, Inc. Announces Fourth Quarter and Full Year 2015 Results,” Chipotle Mexican Grill, Inc.; http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-newsArticle&ID=2134993, last accessed March 1, 2016.) In December alone, same-store sales tumbled 30%. (Source: “SEC Filing, Chipotle Mexican Grill, INC.,” Securities and Exchange Commission, last accessed March 9, 2016.) CMG stock tumbled about 45% by January.

The drop in share price Wednesday comes after CMG stock rebounded about 30% since mid-January following a presentation by the company’s management that outlined how Chipotle was going to win back customers. In February, the Centers for Disease Control and Prevention (CDC) announced that the E. coli and norovirus outbreaks at the chain were finally over.

But the news may not be all bad for Chipotle if this is a self-contained incident that leaves no customers ill.

A survey released last week showed that consumers are showing more willingness to eat at Chipotle, as the negative sentiment over the company’s food outbreaks began to fade:

“It appears that sentiment bottomed in January, with willingness to eat at Chipotle increasing after the company’s digital coupon for a free entrée spurred improved traffic in the latter half of February,” William Blair & Co. analyst Sharon Zackfia said in a research note. (Source: “Willingness to eat at Chipotle increasing; sentiment bottomed in Jan – William Blair,” CNBC, March 3, 2016.)

Credit Suisse analyst Jason West also expressed the same sentiment: “We’re also encouraged by the improved traffic we’re seeing at Chipotle, which suggests customers are willing to give the brand another try and gives us higher confidence in the recovery scenario baked into our model,” West said. (Source: “Chipotle Mexican Grill: Risk of Near-Term Disappointment, Bullish on Long-Term Recovery,” Barron’s, March 7, 2016.)

West also expressed that he is bullish on CMG stock and that he was raising his price target to $550.00.

The Bottom Line on CMG Stock

Investors should take caution here in light of Wednesday’s news. But if Chipotle can get past this latest incident unscathed, it looks like the company is on the right path to recovery.

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