CMG Stock: If You’re Bearish on Chipotle Stock, You Need to Read This

CMG StockCMG Stock Is Out of the Fire

It’s time to revisit Chipotle Mexican Grill, Inc. (NYSE:CMG) stock again. The worst might be over for the Mexican food specialist that prides itself on healthy, high-quality ingredients. Chipotle stock has dropped from more than $750.00 to $404.00 since last January, falling 18% just since November. However, CMG stock has started its climb back upward, rising nine percent so far this year.

During the fall of 2015, a few dozen customers complained of suffering symptoms related to pathogenic Escherichia coli (E. coli) bacteria and norovirus after eating at a Chipotle establishment.

It all started in October, in the states of Oregon and Washington, when some Chipotle customers complained of an upset stomach. Health authorities identified E. coli as the guilty party. Some restaurants in these states had to close. The epidemic then spread to seven more states, including New York and California. In total, 52 customers were affected, but only 20 of these cases led to hospitalizations. (Source: “CDC Update: Chipotle-Linked E. Coli Outbreak Case Count Now At 52,” Food Safety News, December 4, 2015.)

Since William Blair started surveys of about 800 adults in November 2015 and as news of the E. coli cases broke, traffic at Chipotle dropped. The restaurant chain said that revenue for the fourth quarter fell nearly seven percent year-over-year, meaning the chain suffered from bad publicity during the quarter marked by the illness incidents attributed to food from Chipotle restaurants. (Source: “Willingness to eat at Chipotle increasing; sentiment bottomed in Jan,” CNBC, March 3, 2016.)

Yet, the worst may be over for the restaurant chain. Chipotle stock has been recovering steadily since its January low point. CMG stock is trading at $536.00, gaining 2.5% on March 4 alone. As the stock’s performance suggests, hungry consumers were more likely to avoid eating at Chipotle last January compared to now. The company’s smart response—offering a digital coupon for a free entrée—worked as was intended, as restaurant traffic improved in the second half of February. (Source: Ibid.)

Chipotle stock now has the potential to recover all of its E. coli–related losses. That means returning to the $750.00 level.

Chipotle’s fundamentals have not waivered, nor was its business model or product offers ever questioned. As a restaurant, Chipotle is aware of its risks and food contamination is always a danger in this sector. The true test of a restaurant chain’s value is in how it manages that risk and in the measures it adopts to confront a crisis. Chipotle has performed admirably on both fronts.

None of the E. coli cases affecting Chipotle was especially serious. A third of those reporting symptoms were hospitalized, but there were no deaths, according to the authorities. Those infected ranged from 11 to 64 years of age. Therefore, Chipotle does not need to worry about major legal ramifications and it can focus on appealing to the masses, offering its “fresh food cooked on the premises” model.

Chipotle is now looking to export that model. It has already set foot in Canada and now covets a larger presence in Europe, where it has gained a strong following in Britain and Germany. It has four restaurants in France, opening its latest facility in Paris just last October.

In other words, Chipotle is growing and that could help push Chipotle (CMG) stock back to its pre-E. coli crisis trading range of $700.00 to $750.00 per share.

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