Troubled Times At Chipotle

| About: Chipotle Mexican (CMG)

Summary

Chipotle is getting some bids at $385/share.

It will never return to the $700 range unless it grows sales 10 times.

Compare it with Panera Bread or Jack in the Box, which owns Qdoba.

There are some people pounding the table this morning for Chipotle (NYSE:CMG). Good to see our Andrew Hecht isn't one of them. Neither is Stephen Anderson at Maxim.

I'm not as pessimistic as Maxim, which has a sell rating on the stock and wants a 25% haircut. But you're only young once, and that's true for stocks as well. Once a company goes through its speculative phase, then falls to Earth, it has to be evaluated strictly on fundamentals.

What the fundamentals say about Chipotle is that it's still overpriced. The current Price/Earnings ratio is over 37. Compare that with the P/E of 34 currently enjoyed by Panera Bread (NASDAQ:PNRA), a competitor in the fast-casual space that has been literally eating Chipotle's lunch since its E. coli outbreak last year.

At just under $400, Chipotle is selling for a little over twice sales - $11 billion in market cap, $4.5 billion in revenue. Now look at Panera - $5 billion in market cap, $2.7 billion in revenue. They're pretty close, but Chipotle is still pricier.

I have a Chipotle unit near my home, and before the health scares began, it was jammed all the time. The stores have a great system for getting a lot of people through them, with a $10 ticket, very quickly. It's almost as fast as the privately-owned Chick Fil A down the street, but the Chick Fil A is still jammed while the Chipotle is now, often, empty.

The chain wants to change that with a short-term rewards program called "Chiptopia." It seems aimed at the college students who first made its name, with free meals for those who eat there 4, 8 or 11 times per month. If you eat there 33 times over the three months of the program, you get a catered meal for 20.

The program could renew the Chipotle habit among some people, but it's going to be costly, and it's aimed at the base market, not at growth. The chain next reports earnings July 21, with $1.06 billion in revenue and $1.08 in earnings expected, against $834 million in revenue and a loss of 88 cents during the March quarter.

Do you really think that if Chipotle were on track to grow the top line by $200 million over last quarter and deliver over $30 million in profit (against $26 million in losses) it would be committing to this kind of rewards program? I don't.

Now, I happen to think that Panera is selling at a fairly rich multiple right now. It has been brilliant about advertising into Chipotle's niche of quick, healthy, inexpensive meals, usually enjoyed with company. But it is on track to grow its top line only modestly this year - maybe 3-5%, and its normal profit margin is in the 5% range, half what Chipotle was earning in its salad days. I think a lot of investors did just what diners did, flock to Panera when the Chipotle looked bad.

My guess is that the June earnings at Chipotle will disappoint, and that even if CMG gets back its college street-cred for the September quarter, it will be at the expense of margins. You buy Chipotle now based on the fundamentals, and those are now more like Jack in the Box (NASDAQ:JACK), which owns Qdoba - a 26 P/E and 1.8 times sales when times are good.

And times aren't good right now at Chipotle.

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.