Chipotle Mexican Grill (NYSE:CMG) was a market darling for nearly a decade, but the recent food safety scandal rocked it like nothing before. The stock is now off nearly half from its all-time high last year, and the company recently reported a 30% decline in comparable sales -- a level that's virtually unheard of -- along with a criminal investigation from the Dept. of Justice.
Clearly, there's a problem, which we'll tackle in a minute, but first let's address the silver lining on this burrito bowl, which has been mostly ignored by the financial press.
Chipotle is taking advantage of the fire sale to buy back its stock at an unprecedented pace. The board just authorized an additional $300 million to be used to repurchase shares, on top of the $116 million it has remaining from the last authorization. In the fourth quarter, it repurchased 609,000 shares at an average price of $556, or about $339 million worth, with nearly two-thirds of those coming in December, indicating it's ramping up its buybacks as the stock falls.
Why now is the time to buy back shares
In an earlier article, I implored Chipotle to stop buying back shares, but the E. coli crisis has changed everything, giving the company a unique opportunity to add shareholder value for the long term.
The burrito chain has said before that it's making money faster than it can open new stores, and as a result, it's accumulated cash and investments of more than $1.5 billion on its balance sheet without a dollar of debt. If there was ever a time to deploy that cash, it's now. With nearly 31 million shares outstanding and a valuation still above $12 billion, Chipotle will only be able to reduce its shares count by a few percentage points, but if the stock continues to fall, that prospect will become more appealing. If the company can successfully repair its image and recover the lost business, it will emerge even more profitable on the other end thanks to those buybacks.
Should you follow suit?
It's too soon to call bottom on Chipotle as each new piece of bad news sends the burrito stock rolling further downward, but it's a good bet that over the long term, the stock will recover.
Companies often face crises such as this one, and they almost always emerge in one piece, returning to growth in the process. Jack in the Box (NASDAQ:JACK) suffered perhaps the best-known and biggest E. coli scare when more than 700 people were infected and four died in the early 90s. Though it was battered by plummeting sales, that chain and the stock eventually recovered and are much stronger today. Similarly, brands like Odwalla and Taco Bell emerged from E. coli outbreaks and are arguably more prosperous than ever today.
Examples abound in other industries as well. Johnson & Johnson's Tylenol brand recovered from a tainted pill scare that killed dozens in 1982, and more recently, General Motors has moved past a faulty ignition switch problem that resulted in several deaths.
There's plenty of evidence that the media response has elicited an overreaction to the epidemic. Many of the tweets directed to Chipotle on its Twitter account ask if it's safe to eat there now. There have been no reported cases of E. coli since November, and the company has insisted many times over that its food is safe, releasing a comprehensive food safety plan to address specific concerns and procedures. Over a million people eat at Chipotle every day without adverse reactions.
Of course, getting those customers back in the door and rebuilding sales will take time and hard work. Chipotle will need to stay out of the headlines for at least a few weeks, which might be hard with a pending investigation from the Justice Department, but the story and the concerns around it will eventually fade, and its plan to tackle the problem shows that it's serious about fixing it.
Chipotle stock now trades at a lower P/E than McDonald's Corp. (NYSE:MCD). Of course, Chipotle's profits are set to fall over the coming quarters, but its growth prospects are still much more promising than the Golden Arches' over the long term. The burrito roller has not backed off from its plan to open 220-235 stores this year, growing its count by more than 10%. Meanwhile, McDonald's store count actually fell in the U.S. last year, for the first time since 1970. Looking out at a horizon of five years or more, Chipotle will be the clear winner.