Read the debate over CMG.
And here are two similar arguments why the food-borne illness crisis will not stop restaurant chains from thriving again:
It's Absurd to Think That Chipotle Mexican Grill Won't Thrive Again.
Chipotle: Primising Deja Vu.
The one single biggest risk to CMG is another outbreak of E. Coli or other food contamination. So it's really critical that they have it under control, even though nobody can really guarantee 100% food safety. I see hiring its former critic and food safety experts as very positive steps.
It's Deja Vu All Over Again. Don't let a crisis go wasted. It's time for the company to repurchase its own stocks. Agree! From Nov 1 – Mar 14, the company has repurchased $787 million at $493 per share. It has another $180 million authorized for repurchase. Note the striking parallel to the repurchases following the 2012 price crash due to growth and margin scares.
Some critics have argued that Chipotle is facing a more fundamental crisis than E. Coli, namely that its menu has been "stale." I disagree. The company has been innovative, testing new items as part of their practice. The reason that they had not had any big changes in menu was because their customers wanted to keep it simple. However, with the E. Coli crisis hitting the business hard and many formerly loyal customers hesitating or leaving, it's the perfect time to introduce new menu items that can help attract a new cohort of loyal customers. I believe the management have this figured out. (5/23/2016)
(Chipotle story in three minutes)
It's really interesting to note that people actually CRAVE Chipotle burritos. Do a search on twitter or google to see those discussions. Sometimes it seems the craving is worse than Starbucks! You don't think the customers will come back in drove?
Why Millennials Love Chipotle?
A good interview about how Chipotle serves its food in integrity. Any other company able to do this?
The company has no plan to suspend its store expansion (about 220-235 new restaurants in 2016). It's not laying off any worker due to the food scare and slower traffic. Fully staffed.
Wall Street continues to be very skeptical on its turnaround prospect. Analysts have been cutting target prices, sometimes severely. The stock has been hovering in the range of 420-460 post earning report on April 26. It will require significantly good news to break out of this range to get close to 500.
Not surprisingly, mutual funds like Fidelity's Contrafund has been unloading the shares. I remember three years ago when AAPL was hammered down to $400 level from $700+ level pre-split, they were also selling the shares like crazy. Of course in that case, AAPL went on to new high after the release of a larger screen iPhone and a bunch of new products and services. This is another eerie parallel, between AAPL in 2012 and CMG in 2016. A chance for small investors to play contrarian!
It might be hard to believe now, but in two years, CMG is very likely to see new highs.
A downgrade today by the pessimistic Maxim Group. Here is the rationale: traffic may disappoint. It's hard to tell if Chipotle's efforts have been enough to woo back the customers. Patience is required for the ultimate recovery.
Business Insider reports today that foot traffic has returned. Peak lunch hour. Long lines. Costly promotions started to take effects. Brand perception is back up after the devastating E. Coli outbreak.
Another downgrade from a pessimistic banker, Deutsche Bank, with a new price target of $340. This is the second most pessimistic IB after the Maxim Group. They're clearing out of the way. The more optimistic traffic news has not received due respect from the market or analysts yet. I believe if the traffic is improving, the sales result could surprise on the upside for Q2.
The Harris Poll on restaurants still has a very negative effect on the market as many reporters keep referencing it. But, note that the annual poll was based on a sample of 97,120 U.S. consumers ages 15 and over surveyed online, in English, between December 22, 2015 and February 1, 2016. It was during the aftermath of the widely reported E.coli outbreak (the trough in the graph below). Since then the brand has already made a substantial comeback according the YouGov survey
So the reports are focusing on very lagged impression of the consumers.
Chipotle is testing Chorizo in Kansas. Un-informed reporters kept saying Chipotle menu never changes. But they introduced tofu last year. And looks like chorizo may be coming soon. It will help sizzle up sales.
The stock took a beating and fell below $400, a new 52-week low. Today it was recovering, but went lower after this Bloomberg article came out: No News Is Bad News For Chipotle Stock. It contains no new information, but an important error in stating the forward PE = 50. No, it's not 50. Analysts consensus estimate for 2017 earnings is $11.81. At $400/share, the forward PE is about 33-34, the low end of CMG historcal PEs.
Market is pricing in excessively negative news, ignoring positive developments over the last three months. It's therefore very reasonable to expect a positive surprise in Q2 earnings, to be announced on July 19.
A positive comment with target $549. 40% upside.
The sentiments have been decidedly negative for weeks if not months. This article is an example. Analysts, short-sellers, restaurant reviews/surveys/polls, fund managers, ...even insiders, almost all negative! The only thing that could drive more negativity would be another outbreak... When everyone is so fearful about a leader/innovator, it's probably as bad as it gets.
SunTrust optimistic that Chipotle will recover in two years. Price target for 12 months: $550. If you believe the recovery story here, then the price target is likely to be reached as soon as investors see evidence that the SSS inches up after stabilization. Market don't wait that long.
The highly anticipated temporary customer loyalty program is finally here for the summer quarter. It's designed to encourage repeat store visits, and help Chipotle collect data for future marketing. Better than random Buy One Get One (BOGO) sort of deals they've done earlier. This is more systematic, and should create lots of buzz and traffic. Most importantly, the program encourages those frequent customers to come back and enjoy the food safely.
Chorizo has come to the menu.