Is The Recent Plunge In Chipotle's Stock Price Justified?

Apr.30.14 | About: Chipotle Mexican (CMG)


Despite raising the prices of its products, I believe the company is well-positioned to deliver better results in the coming quarter.

The stock is trading at a one-month low of $502.31, so the recent dip in the price is a great investment opportunity, in my opinion.

Chipotle Mexican Grill is removing GMOs (genetically modified organisms) from its product offerings, and now aims to switch to non-GMOs as soon as possible.

Chipotle Mexican Grill (NYSE:CMG) recently announced its first-quarter results, which were very impressive, and the company posted solid growth in terms of sales and net income. Despite posting higher sales and earnings, the company failed to incorporate these results into its stock price. The stock price dropped, and in my opinion, this decline was unjustified. Let's discuss the factors behind the current dip in stock price and determine whether or not it presents an investment opportunity.

Chipotle has consistently delivered positive earnings and surprises in the two out of four trailing quarters. So once again, the company delivered a solid performance that met analysts' estimates. So first, let's analyze the company's first-quarter results.

Revenues for the first quarter were $9 billion, compared to $7.26 billion in the first quarter of 2013. Revenues were far above analysts' estimates of $8.73 billion. The increase was due to the higher comparable stores sales, which grew 13.4% due to better services and higher customer satisfaction. But now, the company is going to increase its menu prices, and expects high single-digit growth in comparable sales for the remaining period in 2014. In the long run, the company is well-positioned to deliver better results, because I do not believe the increase in price will hurt the company's traffic. The company is focused on providing organic and healthier food to its valuable customers, and people will pay a bit more for healthier food.

Food costs were $3.11 billion, compared to $2.39 billion in the same quarter of the previous year. Food costs were 34.5% of the revenues, reflecting an increase of 150 basis points primarily from higher prices of beef, avocados, and cheese. Beef prices have risen to an all-time high, and these trends will continue in fiscal year 2014.

Net income for the first quarter was $83.1 million, compared to $76.6 million, but net margins were slightly affected by higher food costs. The diluted earnings per share were $2.64, up by 7.8% compared to last year, but below analysts' estimates of $2.88 per share for the quarter. The company is planning to open about 190 new stores, which I believe will help the company to further boost its revenues and ultimately lead to a higher bottom line in the coming years.

New Menu Prices and Restaurant Traffic

As an investor, the first question that comes to mind is whether or not the new prices will result in low traffic in the coming quarters. In my opinion, Chipotle will remain immune, as the company is in a completely different situation from its competitors and will be able to easily retain its customers. The following are the reasons why I remain optimistic about store traffic.

  1. The company increased its menu prices for the first time in three years by about 3-5%, whereas other competitors have increased their prices by around 70% in the last 10 years.
  2. The recent increase in the food costs will hurt all the companies in the food industry, and I believe sooner or later, other companies will also review their menu prices and may increase them in the coming quarters. So, a timely decision by the company will serve to benefit it in the long term.
  3. Given the future growth prospects of the organic food industry, the company's latest move towards more organic, lower-carbohydrate ingredients and switching to non-GMO products will further grow its top line, despite the raising prices.

The Steps are Consistent with Industry Trends

Rising income levels and urbanization will drive the fast food demand. The global restaurant industry has been forecasted to grow, and it is expected that the global restaurant industry will reach $3.5 trillion by 2016.

However, in the U.S., people are more conscious about their health and prefer organic foods. Currently, the company is focusing on providing organic food to its customers and successfully growing its revenues over the past couple of years, while main competitors such as McDonald (NYSE:MCD) and Burger King (BKC) will fail to deliver solid results in the U.S market. The company's decision to use non-GMO ingredients will further strengthen its position in the U.S., as demand for non-GMO food remains strong and it is expected that the market could reach $800 billion by 2017.

Final Words

The company stands out in terms of revenues and net profit margin growth compared to the industry averages. The company is also looking to open around 190 stores new stores, which I believe will further increase the company presence and will help the company to further boost its revenues and ultimately lead to a stronger bottom line in the coming years.

Overall, the company's position is very strong, and I believe that the company will be able to deliver solid results in the coming quarters, so I recommend buying the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.