Is Chipotle Expensive At $785?

After a 8.5% decline in Chipotle Mexican Grill’s (NYSE:CMG) stock since the beginning of 2020, at the current price of $785 per share, we believe CMG’s stock has limited upside potential with the stock likely to remain around the current level considering the impact of the ongoing coronavirus crisis.. Notably, the current stock price of $785 is much higher than the stock price of $289 at the end of 2017. We believe that after the coronavirus crisis, CMG’s stock is likely to underperform its peers, including McDonald’s, and could be in line with the broader market. Our dashboard What Factors Drove 171.7% Change In Chipotle Mexican Grill Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

The stock price gain from $289 at the end of 2017 to $837 at the end of 2019 is justified by a nearly 25% increase in Chipotle’s revenues from 2017 to 2019 (primarily due to higher stores and higher comparable sales). This was accentuated by an increase in Net income margin from 3.9% in 2017 to 6.3% in 2019. As a result, the net income figure rose from $176 million in 2017 to $350 million in 2019. The rise of 103.9% in EPS was also helped by a reduction of 2.6% in shares outstanding.

The rise in EPS was combined with an increase in CMG’s P/E multiple, which went up from 46.7x at the end of 2017 to 66.3x at the end of 2019.This reflects a 42.1% increase in the multiple from end of 2017 to end of 2019. The multiple has dropped to 59x currently. This reflects an overal 33.3% increase in the multiple from end of 2017 to April 2020. Further, the increase in P/E multiple between 2017 and 2019 was not just due to a change in the company’s fundamentals (as the EPS rose in 2019), but also because the market had higher expectations of future profits from the company. Similarly, the decline in P/E multiple in 2020 is due to the impact of the coronavirus outbreak, which we explain below.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to affect consumption and consumer spending adversely. CMG’s stock is down by about 9% since January 31, after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 12%. Moreover, about more than 95% of CMG’s total revenue comes from the US region, which is currently the worst-affected country. Many restaurants are closed, while some are running in a takeaway-only mode. And lower consumer spending and consumption over the coming months will likely lead to lower demand for food and beverages. These factors are bound to hurt CMG’s revenues.

We believe Chipotle’s Q1 results will confirm the trend in revenues. It is also likely to accompany a lower Q2 as-well-as FY’20 guidance. If there isn’t clear evidence of the containment of the virus at the time of the earnings announcement, we believe there is a possibility that CMG’s stock could see further downside. However, if there are signs of abatement of the crisis by the time Q1 results are announced, the company’s stock is unlikely to see a major upturn, mainly because the stock has not declined sharply in the first place. CMG has outperformed McDonald’s (-14%) while it is in line with the S&P 500 (-12%). But in the current scenario, we believe CMG’s stock is likely to remain around its current levels, with a limited upside potential post coronavirus.

View our dashboard analysis Coronavirus Trends Across Countries, And What It Means For The U.S. for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture of historic crashes and how the sell-off during early March compares.

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