E. Coli No Reason to Bail on CMG Stock
Chipotle Mexican Grill, Inc. (NYSE:CMG), specializing in Mexican food, has been on the grill lately. CMG stock has suffered for the past two months, as the king of fast-casual tacos and burritos continues to suffer from health woes. Some customers have been affected by an outbreak of pathogenic Escherichia coli (E. coli) bacteria first, followed by the norovirus, after eating at Chipotle.
It all started in October, in 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 them had to be hospitalized. (Source: “CDC Update: Chipotle-Linked E. Coli Outbreak Case Count Now At 52,” Food Safety News, December 4, 2015.)
The case has bounced back in December, as Boston College students reported having some intestinal problems, pushing the number of patients to 141, again with hospitalizations. This time, disorders were associated with the presence of norovirus. (Source: “Chipotle’s Boston College Incident: Norovirus Suspected,” Fortune, December 9, 2015.)
Most of these students had eaten at a Chipotle restaurant near the campus, which was later temporarily shut down so that employees could be tested for norovirus. Norovirus can be transmitted from person to person or indirectly via contaminated water and food.
Chipotle Stock Has Suffered but It Will Bounce Back
Evidently, CMG stock has suffered. In November, the chain with nearly 1,900 stores saw sales plunge 16%. The company conceded to having reviewed its 2016 forecasts downward, losing almost a quarter of its market value since August. (Source: “Chipotle Stocks Sink Because of E. Coli,” US News, December 7, 2015.)
Chart courtesy of www.StockCharts.com
All that is fact. However, the stock has potential, because neither Chipotle’s fundamentals have been affected, nor has its business model been questioned. As a restaurant, Chipotle is aware of its risks and food contamination is always a danger in its 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.
Chipotle’s setbacks will not hinder the growth of the brand. The restaurant has gained a strong following even across the Atlantic, especially among young people, and it has even threatened the supremacy of the McDonald’s model, altering the image of fast food from the elegance of its logo (no coincidence) to the quality of its ingredients.
Under the leadership of its founder, Steve Ells, Chipotle has continued to attract customers relying on the appeal of a “fresh food cooked on the premises” model. It has also positioned itself as a defender of a more responsible agriculture. In 2014, its sales jumped 17%, while McDonald’s sales regressed, causing the departure of its CEO Don Thompson. (Source: “Traffic jump boosts Chipotle restaurant sales, stock soars,” Reuters, January 30, 2014.)
Chipotle Focusing on Growth
Chipotle is now looking to export its model. It has already set foot in Canada and it covets a larger presence in Europe, where it has already gained a strong following in Britain and Germany. Chipotle also has four restaurants in France, having opened its latest restaurant in Paris just last October. In other words, Chipotle is growing.
Ells, meanwhile, apologized for the E. coli and norovirus outbreaks, promising what any serious company would do under the circumstances—to intensify already stringent food safety procedures. Ells’ apology restored some strength to Chipotle stock and additional, promised communications will be forthcoming.
The challenge is to ensure urban youth professionals continue to prefer Chipotle to other fast food offerings, given its healthier food appeal. If that is not sufficient to reassure investors, many restaurants, from the best to the worst, have suffered food poisoning outbreaks.
In the case of publicly listed restaurant chains, all have recovered without a long-term impact. 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 and nine percent each in the next two quarters—many degrees worse than anything Chipotle has had to face. Yet, in 1994, Jack in the Box’s sales increased 2.4%. (Source: “Can Chipotle Mexican Grill Recover from the E.Coli Outbreak Impact?” Forbes, December 14, 2015.)
The bottom line: I’m not bailing on CMG stock just yet.