Chipotle Mexican Grill (CMG 4.84%) is not a cheap stock, with a lofty price-to-earnings ratio of around 50 times. That's after the stock has pulled back around 25% from its all-time highs. But if you are looking for a growth stock, now is probably the time to pay extra attention to Chipotle. The big news at the moment is the surprise departure of the company's CEO. It may not be as bad as Wall Street seems to think.
Chipotle has a long history of big drawdowns
It is hard to suggest that right now is the best time ever to buy Chipotle, given the absolute level of its P/E ratio. But then, there's never really been a best time for this stock, which has long been afforded a premium over other large restaurant companies. That said, Chipotle's current P/E is actually below its 10-year average P/E.
While this is definitely not a good choice for value investors, more aggressive growth investors might still be interested. There are a couple of reasons for this. For starters, Chipotle's stock has not gone up in a straight line. It has experienced a number of material drawdowns of 20% or more. The current nearly 25% drop is the seventh such pullback on the chart above. To be fair, the largest drawdown was around 75%, and there's a big 50% or so drop in that percentage, too. So, the current price decline could continue.
In fact, given the huge stock price decline after the company's CEO announced he was leaving to head up coffee giant Starbucks (SBUX -0.01%), it looks like investors are in a show-me type of mood. That makes some sense, given that Brian Niccol was a highly respected leader in the restaurant space. Instead of being worried, however, long-term growth investors should probably start to get more interested.
You haven't exactly missed the boat at Chipotle
That said, it wouldn't be wise to rush out and buy Chipotle right now. There are a lot of moving parts, including the assignment of Scott Boatwright as interim CEO, the return of an important high-level employee who had just announced his retirement, and the announcement of a new board chairman. However, all of these changes involve people who have been inside the company for years, so it isn't likely that Chipotle's business will suddenly fall off a cliff.
In fact, second-quarter financial results were particularly strong. Revenue was up 18% year over year with same-store sales jumping an astonishing 11%. Restaurant-level operating margin rose 140 basis points to 28.9%. Niccol is leaving a company that is doing pretty well, financially speaking.
Still, some problems need to be fixed. Niccol came in and made some dramatic changes to Chipotle's business, including adding things like drive-thru lanes and digital ordering. These were necessary advances to keep the company in line with the times, but some industry watchers have suggested the company has taken its eye off the ball on important basics. The list includes value (there have been complaints of shrinking portion sizes), customer service, and restaurant cleanliness.
Such problems, particularly if they are accompanied by a return to more normal levels of business performance in the restaurant space, could lead to an even deeper stock price decline. Fixing some of the issues noted above could be difficult, as they are cultural in nature. However, there's no reason to believe they can't be fixed. And they give the next CEO a place to start working. Basically, the departure of Niccol could be the catalyst that gets Chipotle to refocus on its core after a period of dramatic change.
Don't rush into Chipotle, but watch it closely
As noted, Chipotle is an expensive stock. In fact, only aggressive growth investors will probably want to own it. However, given the large price pullback already and investor concerns about the recent change in the corner office, the stock could start to get increasingly more interesting from here. If any more bad news comes out, such as same-store sales slowing to more normal industry levels in the low to mid-single digits, the stock could easily continue to decline. And that wouldn't be at all out of line with the historical price swings here.
Now might not be the best time to buy Chipotle, but if the drawdown deepens to something close to 50%, you might want to think about buying a chunk of shares. The most aggressive investors, meanwhile, might consider taking a starter position now with the expectation of averaging down if the price decline continues. Indeed, there's bad news here. But, so far, no news seems likely to permanently tarnish the Chipotle brand, even though investors are taking an increasingly negative view of the company.
