CMG Stock: Is It Time to Give Up on Chipotle Mexican Grill, Inc.?

CMG StockCMG Stock Will Survive This Crisis

Chipotle Mexican Grill, Inc. (NYSE:CMG), noted for its quality burritos, has seen its name in the headlines linked more to E. coli and hungry students suffering from norovirus outbreaks than its delicious Tex-Mex food offerings recently. Since November 2015, when an E. coli outbreak was first reported at Chipotle, the CMG stock price has dropped from about $600.00 per share to little more than $410.00 per share.

The stock hit its new low range in response to a U.S. Centers for Disease Control and Prevention  (CDC) investigation. This has upturned 12-month stock forecasts. On October 31, before the E. coli news, there was a $190.00 gap between Chipotle’s high and low price targets, according to analysts surveyed by Bloomberg. By January 8, the difference had almost doubled to $338.00.

A Bloomberg survey of 19 analysts also set a new target price of $375.00, while the high was $713.00, citing “significant margin deterioration and more pronounced sales declines than previously anticipated.” (Source: “Chipotle Outbreaks Send Wall Street Looking for Price Bottom,” Bloomberg, January 11, 2016.)

Therefore, Chipotle stock will have to endure more hardship, as the American fast food chain’s woes worsen after being slapped with a criminal investigation over the gastroenteritis epidemic related to its restaurants. Chipotle received a summons from the California federal prosecutor asking it to provide documents as part of an investigation into the quality of food prepared in a Chipotle restaurant in Simi Valley, south of Los Angeles, where a norovirus case was reported last August. (Source: “Criminal investigation under way at Chipotle,” New York Post, January 6, 2016.)

Chipotle Working with Investigators

While, Chipotle has assured the public and investors that it will cooperate with the investigation, the company also said it cannot anticipate the outcome of this case nor can it anticipate “the amount of any fines, penalties or further liabilities in connection with the investigation pursuant to which the subpoena was issued.” (Source: “Federal grand jury subpoenas Chipotle records,” Food Safety News, January 6, 2016.)

Meanwhile, last December, Chipotle admitted reporting to the Securities and Exchange Commission (SEC) that comparable restaurant sales had dropped 16% and that the norovirus outbreak in Massachusetts that month forced sales down by some 34%. (Source: Ibid.)

E. coli infections sometimes cause diarrhea, abdominal cramps, and vomiting. In rare cases, particularly in the elderly or in children, they can cause kidney failure.

The Chipotle E. coli outbreaks 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 those states were closed for investigation and Chipotle closed others as a safety precaution. The epidemic then spread to seven more states, including New York and California. In total, 52 customers were affected but only 20 of these had to be hospitalized. (Source: “CDC Update: Chipotle-Linked E. Coli Outbreak Case Count Now at 52,” Food Safety News, December 4, 2015.)

Chipotle’s Business Model Is Not in Question

As a restaurant, Chipotle is aware of its risks and food contamination is always a danger in its sector. Chipotle has suffered a setback, one well within the risk profile for a restaurant company and one that has not eluded the likes of Taco Bell or Jack in the Box—both of which survived and thrived after. Admittedly, Chipotle’s quality offerings, based on fresh food—especially fresh fish and fresh, often locally sourced, vegetables—is at the heart of the company’s image and could cause difficulties moving forward. As James Surowiecki of The New Yorker writes, “That approach has always been a major branding advantage for the company, but it also makes the task of insuring food safety far more complex, since it means Chipotle has to deal with many different local suppliers, rather than just a few big ones.” (Source: “Can Chipotle Recover from Food Poisoning?The New Yorker, December 10, 2015.)

Chipotle stock also grew, as the company rightfully bragged that its meals were not assembled on the line. Rather, they were prepared in front of the customer, separating it miles away from many fast food competitors and their frozen ingredients that are often prepared and assembled in some back kitchen, away from the customers. (Source: Ibid.)

In the case of publicly listed restaurant chains, all have recovered without a long-term impact, according to Forbes. (Source: “Can Chipotle Mexican Grill Recover from the E. Coli Outbreak Impact?Forbes, December 14, 2015.)

A classic case involves the famous—or infamous—Jack in the Box chain. In 1993, four children died and sales slumped 22% year-over-year, followed by a nine-percent decline in each of the next two quarters. That’s significantly worse than anything Chipotle has had to face so far. Yet, in 1994, Jack in the Box’s sales increased 2.4%. (Source: Ibid.)

The Bottom Line on CMG Stock

Food poisoning-related setbacks did not kill Jack in the Box and Chipotle will certainly recover. The company enjoys a much higher reputation, despite its recent woes, than comparable fast food competitors. Chipotle has gained a strong following, even across the Atlantic, altering the image and concept of what fast food can be.

There will be some short-term pain for holders of Chipotle stock, but they can also maintain their faith in the company’s ultimate recovery and a likely eventual upturn in the CMG stock price.

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