Please ensure Javascript is enabled for purposes of website accessibility

Can Chipotle Stock Bounce Back From Last Week's 13% Drop?

By Rick Munarriz – Jul 23, 2017 at 10:16AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The reeling burrito roller hits a four-year low after a pair of brand-smacking developments.

When it rains, it pours for Chipotle Mexican Grill (CMG -0.84%) shareholders, and the past few days have been a deluge. The burrito roller's stock took a 12.8% hit last week, following a double dose of bad publicity. 

The first hit came on Monday, after Chipotle had to temporarily close one of its Virginia locations following reports, which were later confirmed, of a norovirus outbreak. It sanitized the store and reopened on Wednesday, but then a video went viral with mice scurrying around the dining area of one of its eateries in Dallas.

Interior of a California unit.

Image source: Chipotle Mexican Grill.

Between a guac and a hard place 

Bad breaks happen, but Chipotle investors figured the days of foodborne-illness outbreaks were in the past after the chain introduced new food-safety measures. The stock and store traffic took big hits after a couple of well-publicized outbreaks in late 2015, but comps were starting to bounce back, though they were still far removed from peak 2015 levels. Now the fear is that the brand's recovery will get tripped up as diners grow concerned about food safety again.

The Dallas report is a bit more bizarre, especially since the original customer report claimed the mice started falling from the ceiling. Chipotle blamed a small structural gap in the building for giving the rodents access and committed to making quick repairs. It also reopened the Virginia restaurant on Wednesday. The fixes are easy on both fronts, but repairing consumer perception is the more challenging task.

In fact, by the end of the trading week, shares of Chipotle hit a low not seen since the spring of 2013. The bullish hope is that analysts will pounce on the chance to pump up the stock as a buying opportunity after the sell-off, but that's not happening. 

John Staszak at Argus downgraded the stock from "buy" to "hold" on Friday morning. He sees the latest norovirus episode as denting sales, margins, and -- more importantly for investors -- the stock's valuation. He's lowering his profit targets to $8.10 a share this year, after earlier modeling $9. He's also adjusting his earnings-per-share forecast for next year, taking it from $12.50 down to $12. He's still encouraged by the the chain's long-term prospects, but it's hard to fight the near-term trend. 

Lynne Collier at Canaccord is maintaining her "neutral" rating on the stock but slashing her price target from $440 to $400. Collier thinks the past week's negative headlines will delay the sales recovery.

We won't have to wait long to hear Chipotle tell its side of the story. The struggling chain reports quarterly results on Tuesday, and you know the conference call is going to be more intense than usual. Last week's events took place after the end of the second quarter, but it will be interesting to see if current traffic trends following last week's setbacks trigger a guidance revision.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,506.99 (-0.84%) $-12.79

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
339%
 
S&P 500 Returns
109%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.