Why Chipotle Shares Are Too Hot to Handle

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of casual-dining restaurant Chipotle Mexican Grill (NYSE: CMG  ) are hot, hot, hot -- but not in the good way -- falling as much as 23% after the company reported disappointing second-quarter results.

So what: If you can't take the heat, get out of the kitchen! Chipotle reported second-quarter profit that grew 61% from last year on a 21% increase in sales and an 8% boost in same-store sales. The big news, however, was the company's comments that customer traffic slowed significantly throughout the second quarter, which it blamed on sluggish consumer spending. Chipotle also noted that rising input costs will be a deterrent on margins and, when combined with a traffic slowdown, could lead to slower growth.

Now what: Don't say I didn't tell you so -- because I've told you so more than once! Chipotle is still growing more quickly than many of its peers, but investors had been pricing the stock for perfection. Just last month, one of my biggest beefs (pun wholeheartedly intended) with Chipotle was its overall market value versus the number of stores that were open. That value was more than triple that of McDonald's (NYSE: MCD  ) , Panera Bread (Nasdaq: PNRA  ) , and Starbucks (Nasdaq: SBUX  ) despite the fact that McDonald's profit margins are significantly higher than Chipotle, Starbucks has huge growth prospects in China, and Panera has steadily grown for the better part of a decade, so it has history on its side.

Today's news also brings up concerns about the food sector as a whole; specifically, healthier food options. Chipotle prides itself on serving fresh and natural foods. If consumers are trading down toward cheaper options again, that could be slight cause for concern for a grocer like Whole Foods Market (Nasdaq: WFM  ) that relies on consumers trading up toward pricier but more wholesome and nutritious foods. The situation bears watching, but nothing has changed with regard to my pessimistic view on Chipotle.

Craving more input? Start by adding Chipotle Mexican Grill to your free and personalized Watchlist so you can keep up on the latest news with the company.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Chipotle Mexican Grill, Starbucks, McDonald's, Panera Bread, and Whole Foods Market. Motley Fool newsletter services have recommended buying shares of Chipotle Mexican Grill, Starbucks, McDonald's, Panera Bread, and Whole Foods Market, as well as creating a bear put spread position on Chipotle Mexican Grill and writing covered calls on Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 20, 2012, at 2:03 PM, harkvasa wrote:

    Look at what has happened to Price to earnings multiple of GOOG, AAPL, BIDU , LVS and WYNN.

    All those multiple are down by over 50%.

    CMG long term growth rate over the next 10 years will be close to 20% range. At present, the multiple is over 30

    Based on that, CMG becomes a good buy when PE multiple is close to 20, CMG remains a risky stock until, it trades at close to $200 range. .

  • Report this Comment On July 20, 2012, at 2:48 PM, ikkyu2 wrote:

    "Significant slowing" in same store sales growth means they managed to get 8% same store sales growth.

    The story of Chipotle is still new stores, in my opinion. The market has erred here.

  • Report this Comment On July 23, 2012, at 5:14 PM, EquityBull wrote:

    Looks like it was not company specific. McDonald's reported down too today. All fast food and casual dining getting hit as consumer confidence slides off the cliff.

    I expect things to ratched up if and when our economy picks back up or at least consumer confidence. This won't be until next year the earliest because the do nothing government will ensure nothing gets done and that no confidence inspiring laws or tax codes are addressed. However we will continue to pay them their salary and health benefits for doing nothing but bickering so take solace in that. Maybe grab a burrito and celebrate

  • Report this Comment On July 23, 2012, at 5:30 PM, EvanBuck wrote:

    Good, interesting post. Check out my opinion on Chipotle stocks and others in this article:

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CMG $411.94 Up +6.84 +1.69%
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