CMG Stock: After a Constant Down Fall, Could “Burgers” Raise Chipotle Stock Price?

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Chipotle Mexican Grill, Inc. (NYSE:CMG) stock has dropped 1.86% to about $462.00 per share this week. Chipotle stock has not managed to recover after the company reported that same-restaurant sales in February fell more than analysts had expected. Indeed, CMG stock investors are bracing for the slightest of good news in Chipotle’s food safety crisis.

Investors need a reason to hold on, to keep the stock in their portfolio. Many probably regret getting into Chipotle stock when they could have chosen the more reliable McDonald’s Corporation (NYSE:MCD) to satisfy their hunger for long-term hospitality sector opportunities. Stephen Anderson, an analyst at Maxim Group, has downgraded Chipotle stock from “Hold” to “Sell.” He even dropped the price target from $450.00 to $350.00. (Source: “Chipotle Mexican Stock Seen Sliding to $350,” Barron’s, March 17, 2016.)

However, Chipotle stock is more attractive in the long term. Chipotle Mexican Grill has built a strong reputation with the public. The chain, while enjoying widespread recognition, is still in its relative infancy. This means it has enormous growth potential in its U.S. home market and even abroad. The state of California alone has a bigger population than Canada and several European countries.

Chipotle patrons have never questioned the quality of Chipotle’s products. Surely, the E. coli virus outbreak has dealt a blow to the company’s reputation, but the crisis was more of a public relations problem than a medical one. The cases were relatively few and the consequences mild. This was not the same as the Jack in the Box Inc. E. coli case of 1993. On that occasion, at least four children died from directly related causes. (Source: “Do Meat and Poultry Handling Labels Really Convey Safety?Food Quality and Safety, March 31, 2014.)

As for health, investors and customers alike will be happy to know that, despite the bad press, Chipotle’s health policy works. Chipotle demands employees stay home if they are sick, paying them. In other words, a sick employee has no incentive to show up at work whatsoever. Most recently, a Boston-area (Billerica) Chipotle restaurant was in the news for a norovirus “outbreak.” (Source: “Opinion: The case for buying Chipotle (both the guac and the stock),” MarketWatch, March 23, 2016.)

It happens that there are 22 million cases of norovirus in the U.S. each year. In the case of the Billerica restaurant, a Chipotle employee contracted norovirus and stayed home. Chipotle closed the restaurant to disinfect it, and it was under no obligation to report the case at all. The media news outbreak happened because a concerned parent of one of the workers leaked the story to the media. (Source: Ibid.)

Chipotle stock will thrive because consumers, albeit still in a hurry, clearly demand healthier foods. If anything, McDonald’s is being forced to change toward the Chipotle model. Chipotle, with its fresh meat, vegetables, and tortillas, is the future of the fast food industry, considering the habits of American consumers—not to mention the international ones.

CMG stock appears to have left the worst behind and its business case is still valid. Chipotle continues to suffer from the E. coli and norovirus cases that emerged last fall. Now, the comparison with McDonald’s will be more tempting. Chipotle wants to extend its healthy model from Mexican fast food to good ol’ burgers. It has filed an application to register the name “Better Burger” as a trademark. This suggests that Chipotle may spin off a new burger division. (Source: “Chipotle Considers Opening Chain under ‘Better Burger’ Name,” Bloomberg, March 28, 2016.)

Chipotle plans to launch a burger chain capable of competing with McDonald’s and Burger King. Chipotle is taking a cue from higher-quality burger retailers such as Five Guys Burgers and Fries. The burger is a lucrative market—burger restaurants generated approximately $73.0 billion in sales in 2014 in the U.S., according to Burger Business trade magazine. (Source: Ibid.)

Chipotle is now looking to export its model. It has already set foot in Canada and now covets a larger presence in Europe, where it has already gained a strong following in Britain and Germany. It has four restaurants in France, opening the last facility in Paris just last October. In other words, Chipotle is growing and that will help push Chipotle stock back to the pre-E. coli crisis $700.00–$750.00 trading range.

While the eating public appears to have abandoned Chipotle, if you take the media headlines at face value, Chipotle investors should hold on to their shares. The company expects to turn CMG stock and sales around. It is doing everything possible to bring people back into its restaurants, such that they can taste the reasons that made the Mexican food specialist popular in the first place.

CMG stock will have to rely on investors’ confidence in the company’s growth-based strategy.