Fri Oct 30 2015
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Chipotle: Don’t Buy the Drop Just Yet

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Chipotle Mexican Grill (NYSE:CMG) reported its Q3 earnings earlier this month. Despite beating estimates on revenue and earnings, investors weren’t pleased as comparable-store sales slowed down. Revenues for the quarter increased 12.2% to $ 1.22 billion while net income jumped 10.8% to $ 145 million. Comparable-store sales increased 2.6% in Q3 just above the 2.4% that analysts were modeling. The company ran up against a high comp from a year ago and did nicely to beat the analysts’ estimates due to several price hikes.

Although the results weren’t bad and had many positives, shares fell about 5% in after-hour trading as investors were concerned about the slowing growth. Chipotle has historically traded at a premium P/E multiple, so investors are rightly concerned about the company’s slowing growth. Despite the fact that Chipotle was trading at a historically low P/E multiple pre-earnings, the stock has taken a beating due to the slow growth.

Moreover, other factors like increasing commodity prices, rising labor costs and a shortage of pork have shaken investors’ confidence in the stock. Increasing costs and slowing comps haven taken a toll on the company’s profit margins as restaurant-level operating margin fell 50 basis points year over year to 28.3%. Considering the headwinds, investors can expect Chipotle to continue falling to around $ 600 in the short term.

Looking at the bright side

Carnitas are a popular choice of Chipotle customers, so the reducing same-store sales isn’t surprising given the shortage of pork supply. The supply constraints have seen Chipotle’s traffic slow down dramatically over the last few months, but the company recently entered into a partnership with its new pork supplier Karro Food Group.

It is believed that the carnitas are now available at 90% of the Chipotle outlets in the U.S. and will be available in all the outlets by November. This should soften the blow of reducing same-store sales. In addition, the company also revised its expansion plan and now aims to open 220 to 235 new outlets in 2016.

Bearing in mind that companies like McDonald’s (NYSE:MCD) have more than 14,000 outlets in the U.S., Chipotle definitely has more room to grow in the U.S. Besides, the company has barely set foot in the international market and can grow into several markets worldwide in the long term.

Conclusion

While Chipotle’s long-term growth story is intact, investors should sell the stock and wait for a better entry point. The short-term headwinds mentioned above will take a toll on the company’s share price in the coming months and investors can expect stock price to fall under $ 600 in the coming months.

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