It's been about two weeks since hundreds of cases of a possible foodborne illness outbreak were reported at an Ohio Chipotle Mexican Grill (NYSE:CMG) restaurant. In a surprise twist, the stock market collectively shrugged, almost as if investors are no longer fazed by such developments.
But since Chipotle dramatically altered its food-handling and food-processing procedures after a spate of outbreaks two years ago, the market may also realize that this is not the same fast-casual restaurant chain it once was.
It's different this time
Health officials are investigating claims by nearly 700 people who say they felt sickened after eating at a Powell, Ohio, Chipotle restaurant. Symptoms include nausea, diarrhea, and fever, but the cause has not been determined.
Chipotle Mexican Grill closed the restaurant so that officials could inspect it but reopened two days later after "the inspection team found no reason for the facility not to reopen." No new cases have been reported since.
Chipotle has been on tenterhooks since its reputation was sullied in late 2016 following repeated illness outbreaks across the country that ranged from norovirus infections to E. coli poisonings.
The possibility of new outbreaks has largely kept its stock grounded. However, earlier this year, a strong earnings report and plans for growth by the chain's new CEO sent shares soaring 24%. Solid revenue growth, along with a potential new marketing push that would highlight Chipotle's "food with integrity that's craveable," elated investors who had become inured to unpleasant tidings.
A new foodborne illness outbreak could have been enough to derail investor enthusiasm. But though the stock did dip sharply momentarily, its quick rebound indicates that investors are no longer holding the chain to a standard they don't apply to other restaurants.
A sickening development
McDonald's (NYSE:MCD), for example, recently had its own food safety scare when hundreds of people were sickened after eating the fast-food burger shop's salads. McDonald's removed the offending items from more than 3,000 restaurants across 13 states. And while the burger joint's stock is down a fraction of 1% from where it was prior to the news, that's hardly the sort of damage that was inflicted on Chipotle Mexican Grill during its big food scares.
Maybe it's the frequency of outbreaks these days that's causing shareholders to ignore the news. Salads and wrap products sold at Kroger, Walgreens, and Trader Joe's were just recalled for possible E. coli contamination; Kellogg's Honey Smacks and Pepperidge Farm Goldfish were also recalled for potential salmonella poisoning. There are reportedly 48 million cases a year of food poisoning in the U.S.
It's also possible that investors forgave Chipotle because it's still not certain that whatever was ailing people was actually tied to the chain. Reports of illnesses first began appearing on a website called IWasPoisoned.com, but stool samples from people who reportedly felt ill have come up negative for E. coli, norovirus, salmonella, and shigella, which suggests the possibility that a large number of cases could be attributable to mass paranoia.
Chipotle Mexican Grill has dramatically reformed its food safety procedures since 2016, but though its stock recovered this time, it is still going to remain volatile if similar events continue to be reported. Investors, however, can perhaps stop worrying that the stock will plunge every time there is a report of foodborne illness associated with the chain.
That doesn't mean this is the time to buy into the fast-casual chain. Chipotle stock trades at almost 80 times trailing earnings and 40 times next year's estimates, while McDonald's goes for just 20 times earnings.
Chipotle Mexican Grill may be able to return to its prior growth trajectory, but with the stock up 68% year to date, investors might be better off waiting for the chain to prove that last quarter wasn't a fluke. After all, Chipotle was up against an easy year-over-year comparison, and this latest food-safety episode indicates it might not be on firm ground yet.