Chipotle's Shares Have Fallen Far, We May Be Near A Floor

| About: Chipotle Mexican (CMG)

Summary

Chipotle Mexican Grill's business model and growth are intact despite the E. Coli scare.

With shares having fallen over 40%, it may be a good opportunity to buy.

Low gas prices, good jobs numbers, and the continued popularity of the company's food all provide tailwinds to help lift the stock.

Chipotle Mexican Grill (NYSE:CMG) has had a rough run of late, to put it mildly. Dealing with the national public relations fiasco of customers getting sick from a serious bacteria is not only challenging, but is the kind of thing that has the potential to actually destroy a company. It has already caused the stock to fall over 40%, from a high of $757 a share back in August to today's price of only $445. But company management has done a pretty good job of dealing with the situation, and the restaurants are still growing and very popular. The currently depressed share price may provide a nice opportunity for the enterprising investor to make some serious money over the next few years as the business continues to grow and people forget about the E. Coli scandal.

CMG's growth is slowing, but it is still growing faster than most companies, and now has around 2,000 locations throughout the United States. And while some were arguing that stock looked a bit expensive back in October after the company reported quarterly YoY revenue growth of 12% and earnings growth of 10.8%, it is now far cheaper than it was then. In some ways the E. Coli scare may have even been good for long-term investors, as it provides an opportunity to buy shares at a huge discount to what they were trading for only a few months ago. Their results continue to be impressive, even if they aren't quite as good as in the past couple years in terms of growth. But no company can grow at 30% forever, as Apple's (NASDAQ:AAPL) recent earnings report shows.

CMG's trailing P/E is now only 26, compared to a much higher 34 about three months ago. Companies like Starbucks (NASDAQ:SBUX) are still trading at around a 35 multiple, while not growing as quickly as CMG. And while SBUX hasn't had to go through an E. Coli scandal, CMG has recovered well and was very smart in closing all of its stores for most of the day earlier in the month for a company-wide staff meeting to address the problem. This showed the public that CMG is taking the problem seriously and is even willing to lose a large amount of money to make sure it is acting responsibly. It is also simply good PR, which the company desperately needs right now.

But the PR fiasco aside, CMG has some strong tailwinds that should help it to continue growing, albeit at a slightly slower pace than in the past. With Saudi Arabia, the largest oil producer in OPEC, recently announcing that they will continue to produce oil at high levels despite the global oversupply, prices continue to decline. The more oil prices decline, the more consumer discretionary spending increases. In fact, research shows that consumers in America spend up to 80% of their gas savings, and the largest portion of this is spent at restaurants. It is estimated that the average American spent over $2000 a year on gas before the decline in prices over the past year. If that statistic above is true - that we spend 80% of our gas savings, and most of that goes to restaurants - then the average American is easily spending over $1000 a year at restaurants, a substantial figure.

In addition to the nice growth figures above, CMG still has an outstanding 24% ROE and 11.57% profit margin, which is actually really high for the restaurant industry. It may surprise many people not familiar with the restaurant business, but depending on the sector, average margins range from only 2-6%. So, CMG's margins are more than double those of most restaurants, which provides the company with ample cash flow to continue growing its business and rewarding investors. With $960 million in cash and a very strong current ratio of 4.39, the company can easily meet all of its liabilities, and if it needed to, could raise debt, as it currently has no debt on the books whatsoever, which is very rare in corporate America.

So, while the E. Coli scare has obviously caused the company some major pain, it may turn out to have provided long-term investors with a nice entry point for this high-quality growth stock. With the multiple tailwinds mentioned above, strong fundamentals, and the growth story still intact, its business model will continue to thrive as the fickle public forgets about the E. Coli issue completely. In fact, CMG's food may end up being more safe than most other restaurants as the company is forced to greatly increase inspection and quality management as a response to the problem. For long-term investors looking for growth in this volatile market of early 2016, CMG may provide that opportunity at current levels.

Disclosure: I/we 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.