This has been a rough year for Chipotle Mexican Grill, Inc. (NYSE:CMG).
CMG stock has plummeted nearly 40% since late October after an outbreak of E. coli and the norovirus hit several of its restaurants across the United States. Same-store sales plunged 14.6% in the fourth quarter. And when things looked like they couldn’t get any worse, Chipotle’s operating margins were cut by nearly a quarter.
Is it time to bail on the burrito chain? Hardly. The bad news has given investors an once-in-a-lifetime opportunity to scoop up shares of Chipotle stock on the cheap. I suspect those selling now will be kicking themselves later.
Let me explain…
The No. 1 Reason to Like CMG Stock
Chipotle reports its first earnings tomorrow since the outbreak began. Earnings per share are expected to dive more than 50% from $3.84 per share to $1.86 from the same quarter last year, while revenue is expected to fall to 5.8% to $1.01 billion, but this bad news is already priced into the stock. (Source: “Chipotle Mexican Grill, Inc. – 2 Spicy Trades for CMG Stock,” Investorplace.com, February 1, 2015.)
But is the worst over for Chipotle? Since November, there have been no reported cases of E. coli. On Monday, the U.S. Centers for Disease Control and Prevention (CDC) said the outbreak appears to be over. This news sent Chipotle shares soaring four percent on the good news.
The question now is whether Chipotle can lure customers back to their restaurants by re-establishing the trust that they still sell high-quality food. Management is taking major steps to prevent another outbreak. This includes shutting down every Chipotle on February 8 to outline its food safety protocols with all employees.
It usually takes a while for a company to erase the stigma of bad news, but a good company always finds a way to emerge from the ashes and bounce back. In the early 90s, Jack in the Box Inc. (NASDAQ:JACK), suffered an E. coli outbreak at its restaurants in which 700 people were infected and four died. Sales plummeted, but eventually the chain recovered and the stock is much stronger today.
A similar case happened at Taco Bell. The restaurant also suffered from an E. coli outbreak in 2006. Following the news, shares of parent firm Yum! Brands, Inc. (NYSE:YUM) initially tumbled. But with the roll out of new safety measures, the company eventually recovered.
In both cases, the bad news created unique buying opportunities for investors. Customers eventually forgave the restraint chains, coming back in droves. Investors who bought shares during the turmoil made a fortune.
The same thing could play out at Chipotle. Today, CMG stock now trades at 28 times trailing earnings, almost on par with McDonald’s Corporation’s multiple of 27. This is kind of absurd, given that McDonald’s is shutting down restaurants, while Chipotle is still expanding.
The Bottom Line on CMG Stock
I’m not the only one bullish on Chipotle stock. Last month, the company’s board authorized a $300-million share buyback, citing the stock’s exceptionally cheap valuation. Talk about putting your money where your mouth is.
If executives are backing up the truck on CMG stock, maybe you should be optimistic too.