Opportunity in Chipotle?


Chipotle (NYSE:CMG) has recently found itself to be the punchline of many late night television jokes after its E. Coli incident. The stock is down over 45% from all time highs in October. This E. Coli outbreak has come after the stock has posted impressive comps for a long period of time. Yesterday the company filed an 8-K indicating Q4 comps were -14.6%. I am expecting Q1 to be horrible too considering they had a 10.4% comp in Q1 2015. The big question is if they can get their customers to come back. By understanding other food borne outbreaks in the past, one might be have an idea about what is ahead for Chipotle. Food borne outbreaks worth looking at include Blue Bell (2015), Taco Bell (2006), Jack in the Box (1993).

These three outbreaks were all handled differently. Jack in the Box was the worst because they initially blamed others which became a PR nightmare. Chipotle has done a pretty good job handling the incident. In all three outbreaks listed above there is one commonality. Customers forgot about the outbreak and resumed consuming the food they like. Eventually this could be the case with Chipotle. However, it’s probable that the company could post a -10% to -20% Q1 2016 comp when looking at their Q1 2015 comp and the -30% comp they had in December.

Despite all of the recent negative headlines, Chipotle is a great company. They use 68 quality ingredients across the entire menu compared to typical fast food where a single item have can as many as 100 ingredients, many of which are chemicals. This high quality food will help customers come back faster than if it was a traditional fast food restaurant. Chipotle is making investments in mobile technology and the company is adding a second order line just for its online and mobile orders. It’s like having a store within a store. In addition, the company has partnered with tremendous delivery services like Postmates and Tapingo. Both are producing 30% quarterly growth.

Chipotle will soon launch its new mobile technology which will include a mobile payment method. The company has discussed using Apple Pay or something similar. This is a big opportunity because it will collect data about their customers in order to better meet their needs. Chipotle hired Curt Garner away from Starbucks in Q3 2015 to be the CIO. Curt Garner helped Starbucks go from 2,000 stores to a global powerhouse. He is an exciting addition to the company and could make a big difference in the roll out of the new technology.

Historically Chipotle’s valuation has been rich. An intrinsic valuation is tricky considering they retain all profits to reinvest in opening new stores or buying back stock. Not to mention, projecting future growth based on historical growth rates is usually not accurate. Valuing the stock on a relative basis makes more sense in my opinion. I like to compare Chipotle to Starbucks (NASDAQ:SBUX) because they are similar in terms of risk, growth, and cash flows. Relatively Chipotle is cheap on nearly every metric against Starbucks.


This hiccup for Chipotle has reset expectations. Prior to it, the company was wildly expensive. Expectations have been reset and as the company distances itself the gap between Starbucks 31 P/E and Chipotle’s 26 P/E may be closed. If they can close the P/E gap in 2017 and earn just $15.20 per share which assumes no earnings growth for the next two years, shares could be worth around $470. This represents 13% upside assuming no growth. This would be huge shock considering they have nearly doubled their earnings in the last three years.

Chipotle will open an estimated 190 new stores in 2016 which equates to a 10% increase in store base. The company is also buying their stock back hand over fist. In Q4 the company bought about $340 million worth of stock and the board approved an additional $300 million buyback.

Chipotle has tons of growth ahead with only about 1,850 stores open including the stores in Canada and the UK. The new ShopHouse and Pizzeria Locale restaurants only account for 13 stores and these two ideas could together have more stores than Chipotle stores down the road.




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