Potential Chipotle Mexican Grill (NYSE:CMG) investors may be partying like it's May 20, 2014. That's the last time that shares of the now slumping burrito roller closed below $500 -- before doing exactly that yesterday.
Circumstances are entirely different this time. Analysts are revising their profit forecasts, price targets, and stock ratings lower these days. Chipotle was the market darling of fast casual 19 months ago, winning patrons on the back of its "food with integrity" mantra. Now it's the integrity of its food that's bubbling over into what will be its first quarter of negative comps as a public company.
Today's Chipotle is in crisis, and yesterday's sell-off following an analyst downgrade on the heels of yet another E. coli outbreak was reported reminds us that things have yet to hit rock bottom.
JPMorgan Chase analyst John Ivankoe isn't mincing any words in his rebuke. He's downgrading the stock to a neutral rating, taking Chipotle's co-CEOs to task for going on a media tour earlier this month, making stops on Today and Mad Money to say that the outbreaks were a thing of the past. They're not, and with that Ivankoe concludes that the nightmare may be just beginning.
"At this point, even rational and informed consumers could potentially be given reason to pause when choosing Chipotle over the plethora of fast casual competition in the marketplace," Ivankoe writes in light of the Centers for Disease Control and Prevention's press release about five new illnesses that are possibly tied to the chain's edibles.
Instead of having the CDC close the case, we may be at the point where expanding the investigation is in order, Ivankoe suggests.
Wall Street was already assuming the negative ramifications would last beyond this blown holiday quarter. Over the past month we've seen analyst projections for 2016 shrink from $20.32 a share to $16.78. With this week's development -- even if it's ultimately limited in scope or if Chipotle is cleared entirely -- it's going to linger. That may be welcome news to Chipotle buffs enjoying the shorter lines these days, but it's not what shareholders want to hear.
The silver lining is that Chipotle's not going away. It's also a much larger chain than it was at the last time its stock closed below $500. We've seen the restaurant count grow from 1,637 to 1,931 in the six quarters that have gone by. Trailing revenue has gone from $3.2 billion over the past year to $4.6 billion.
Things won't be easy in the near term. Comps will stumble. Margins will get pinched. Expansion may even slow if the negativity lingers. However, when Chipotle does redeem itself -- and it will -- it's going to have a larger base of restaurants and customers to serve. That's important. It's why patience will be rewarded, but that same waiting game also applies to folks wanting to take advantage of the depressed share price as an entry point. Calling bottom has been a dangerous pastime in recent weeks, even for those with the gastrointestinal fortitude to see things through.