Is Chipotle’s Stock Undervalued?
Chipotle Mexican Grill’s (NYSE: CMG) stock price has been on a downward spiral ever since its food was found contaminated with the e. coli virus last year, and our price estimate of $471 is now almost 20% higher than its current market price. While the comparable sales of the company’s restaurants have been significantly hit in the recent quarters, and we expect restaurant visits to decline this year, we believe the company is taking enough measures to strengthen its food safety and win customers back in the long term. The current market price does not appear to be factoring in a recovery in sales in the next few years and hence is much lower than our expectations.
See Our Complete Analysis For Chipotle Mexican Grill
Chipotle’s High Quality Of Food Products Should Enable Customers’ Return
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While the e. coli scandal had a significant impact on Chipotle’s sales, we believe things will start improving next year. The company has always been confident of its innovative and delicious food items, as well as ‘food with integrity’ campaign and has never compromised on the quality of the food products. After the e. coli scandal broke out last year, the company has taken several measures to avoid such incidents from repeating in the future and maintaining high quality standards. These measures include the appointment of industry veterans as food safety consultants, and financial assistance to help small farmers meet its new food safety requirements. (Read Here’s How Chipotle Is Strengthening Its Food Safety Program). We believe these measures will bring customers back to Chipotle’s restaurants and the recovery should begin next year.
The three key drivers of Chipotle’s valuation (according to our estimate) are: 1) total number of restaurants, 2) average number of visits per restaurant per year, and 3) average spend per visit. While the annual growth in total number of restaurants is on target and not impacted by the e. coli outbreak, the other two drivers were negatively impacted by this issue. However after a decline in average number of visits per restaurant per year from 186,000 in 2015 to 175,000 in 2016, we expect this number to increase gradually and reach 188,000 by 2022, slightly higher than the 2015 number.
However, in order to arrive at Chipotle’s market price of around $392, we need to create a scenario where this metric continues to decline and reaches 160,000 by the end of our forecast period, assuming that the other two drivers will behave as per our estimates. We believe the likelihood of this scenario is very low.
After a decline from nearly $13 in 2015 to $ 11.70 in 2016, we expect average spend per visit at Chipotle’s restaurants to increase gradually and reach $ 12.30 by 2022 (end of our forecast period).
We believe this is achievable given the steps Chipotle is taking to regain customer confidence.
The market appears to be in “wait and watch” mode and is not giving any credit to Chipotle for future growth in customers or average ticket size, and expects the decline in sales to continue. However, if recovery and growth in the future is considered, at current levels Chipotle’s stock appears to be undervalued.
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