CMG Stock: This Is Why the Bears Are Wrong on Chipotle Mexican Grill, Inc.

CMG StockLots of Upside Left for CMG Stock

Chipotle Mexican Grill, Inc. (NYSE:CMG) just reported first-quarter earnings and it wasn’t pretty. In fact, it was the burrito chain’s worst quarter ever, as the company suffered its first-ever quarterly loss. Investors were hitting CMG stock hard Wednesday morning, with the stock down nearly five percent. And since the start of a number of food safety incidents that began last October, CMG stock is down about 42%.

However, there’s still a lot to like about Chipotle Mexican Grill. Let me explain.

After the bell on Tuesday, Chipotle reported a loss per share of $0.88 for the first quarter. That’s a huge plummet from the profit of $3.88 per share a year earlier. Profit was largely hurt by the company’s aggressive attempt to lure customers back. Chipotle gave away more than six million free burritos, as well as nearly one million free orders of chips and salsa.

Same-store sales plunged 29.7% for the quarter, which is a bit more than analysts’ expectation of 28.4%. But there just might be some good news.

Same-store sales for the first three weeks in April declined 22%. This compares to January, which was the height of the foodborne illness outbreak at the chain, when the company reported same-store sales plunged 36%. Chipotle also recently reported declines of 26.1% and 24.4% in same-store sales in February and the first two weeks of March, respectively.

So the good news is that customers are returning to restaurants—they’re just not returning as quickly as impatient investors would like.

There’s a bit more good news. The earnings loss is not as bad as analysts were expecting. According to Thomson Reuters, analysts were expecting an even steeper loss of $0.95 per share. (Source: “Chipotle freebies fail to overcome food safety fears; shares fall,” Reuters, April 26, 2016.) And for the second quarter, things should get better on the earnings front, as Chipotle CFO Jack Hartung said the company does not expect a loss in the second quarter of this year.

Bears have hit CMG stock hard and they are reacting as if this is the end of Chipotle. Or at the very least, they have the mindset that Chipotle’s customer visits won’t return to their same levels prior to the outbreak.

This is just wrong.

Sales trends are continuing to improve and they should keep improving as the year continues. As long as Chipotle doesn’t suffer another outbreak, it should have no problem achieving this.

But it may take a while before Chipotle returns to the peak same-store sales of $2.5 million per restaurant that the company reached before the foodborne crisis. (Source: “Chipotle’s Best-Case Scenario Is Recovery by 2018, Wedbush Says,” Bloomberg, March 29, 2016.)

It may not even achieve this for two or three years. Nevertheless, the point is that Chipotle should get back to those levels eventually.

In fact, in a recent report, JPMorgan analyst John Ivankoe noted that Chipotle’s food safety issues have cost the burrito chain three years of earnings growth. He said that Chipotle’s earnings should reach 2014 levels by 2017, and he also believes that Chipotle will return to 20% or more earnings growth by fiscal 2018. (Source: “Chipotle Mexican Grill, Inc. Upgraded Ahead Of Earnings,” ValueWalk, April 14, 2016.)

In the meantime, Chipotle is continuing to add new restaurants, which should help fuel its top and bottom lines a bit. Chipotle says that margins will begin to improve and should gradually approach levels seen before the foodborne outbreak.

Chipotle also has more than this going for it. The company still has lots of room to expand in the U.S. as well as internationally. And apparently, according to a patent filing, the company is looking to start a burger business.

The Bottom Line on CMG Stock

Things look kind of bleak right now for Chipotle Mexican Grill. However, sales are steadily improving and the company still has a lot of upside for growth over the next few years. With the stock having been absolutely hammered over the last few months, this may be a good opportunity for investors to take a look at CMG stock.