Shares of Chipotle Mexican Grill (CMG) have been clobbered this year, now down around 32% from its peak levels, just shy of $2,000.
Though Chipotle offers consumers a health- and value-conscious option that could make the company more resilient in the face of an economic slowdown, recent strength and recession resilience are unlikely to excuse its stock from further downside if we’ve yet to reach a bottom in this sell-off.
Sure, Chipotle stock remains one of the most intriguing fast-food stories. Billionaire investor Bill Ackman remains a big fan of the stock. That said, the valuation — like its hot sauce — seems way too hot to handle at this juncture. At writing, CMG stock trades at an uncomfortable 55.4 times trailing earnings and 4.7 times sales.
You’ve still got to pay up for premium growth. But with such a lofty multiple, it’s hard to find value, even after its stocks suffered a nearly 33% haircut from peak to trough. Chipotle is doing many things right and will fare well in an economic slowdown. However, the bar looks high and upward pressure on costs could continue to weigh through year’s end. For these reasons, I am bearish on the stock.
On TipRanks, CMG scores a 6 out of 10 on the Smart Score spectrum. This indicates a potential for the stock to perform in-line with the broader market.
Margin Pressures could Worsen Before they Improve
It doesn’t matter which firm we’re talking about; inflation has hit many corporations where it hurts most: margins.
Chipotle prides itself on its fresh, healthy ingredients. Health consciousness has been a top priority for many consumers, from millennials to Baby Boomers. Though the long-term health-consciousness trend is still in play, it could take a backseat to value consciousness as economic growth winds down.
Fresh, healthy ingredients tend to be quite pricy, with a limited shelf life, and are prone to contamination. While another E. Coli outbreak is incredibly unlikely, given the protocols in place at Chipotle, higher input costs could continue to weigh on the firm’s margins.
Avocadoes, meat, and other fresh veggies have felt the full force of food price inflation. While Chiptole has some pricing power and can pass higher costs to consumers, it seems unlikely it will be able to minimize a negative sales impact in the face of a slowdown.
Now, Chipotle can invest in other areas, like technologies to enhance margins or the loyalty program to maintain robust demand. However, margin pressures may not subside anytime soon, leaving the firm in a tough spot as the consumer’s wallet gets stressed.
How Will Chipotle Fare if a Recession Arrives?
Though a recession is not guaranteed, it’s hard to imagine consumers are going to be willing to pay a bit more to go to a premier fast-casual restaurant like Chipotle relative to making their own meals, or going to a fast-food joint that offers more in the way of value offerings.
Undoubtedly, McDonald’s (MCD) tends to take share from pricier restaurants when economic times get tough. With its strong loyalty program and custom-tailored coupon offers for additional savings, I see many consumers passing on Chipotle or a fancy restaurant in favor of a less health-conscious, albeit far cheaper option.
Though McDonald’s is far more resilient in the face of hard times, I think Chipotle can fare well in a recession, especially if it’s mild. The Federal Reserve acknowledges that economic damage may be a natural consequence of raising rates to curb inflation.
However, as the Fed cools the economy, it seems like a crisis-style downturn is unlikely. Indeed, the Fed has its eye on the data and can react accordingly to provide the greatest relief from inflation. Essentially, it’s a balance between keeping employment healthy and reducing inflation.
If a less-severe recession (or lack thereof) happens over the next 18 months, Chipotle may still be able to maintain the strength of its sales. Further, there’s still a lot of savings that consumers built up during the early days of the pandemic. With such a cushioned nest egg, many may be less inclined to make their own burritos rather than going to Chiptole.
Food at Chipotle is pricier than your average fast-food chain. However, it’s not that expensive, especially for health-conscious consumers who can still afford it in a mild downturn.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, CMG stock comes in as a Moderate Buy. Out of 19 analyst ratings, there are 13 Buy recommendations and six Hold recommendations.
The average Chipotle Mexican Grill price target is $1,782.13, implying an upside of 33.82%. Analyst price targets range from a low of $1,335 per share to a high of $2,200 per share.
The Bottom Line on Chipotle Stock
Chipotle is a great company that’s fallen under the weight of inflation. Though inflationary headwinds will pass with time, moving into a stagflationary environment could induce further pain in shares as they settle into a new valuation range.
In short, Chipotle is a wonderful company that’s priced with a lot of expectations in mind.
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