Chipotle Stock: the Good, the Bad, and the Ugly

Chipotle Stock has been a darling on Wall Street for many years. Investors loved the growth and margins the company was churning out quarter after quarter and year after year. But then Chipotle (NYSE: CMG) started to hit some roadblocks.

The biggest one came in 2015 when an E. coli outbreak closed many stores and earnings suffered. Investors fled as well, many never to return.

It’s been 2 years now since the E. coli outbreak and Chipotle is still working on trying to win back both customers and investors. With the recent earnings report yesterday, it looks like Chipotle stock is well on its way to doing just that.

But is the future all rosy for the company or are there still challenges ahead? Here is the good, the bad and the ugly going on with Chipotle stock.

Chipotle Stock: The Good, The Bad, And The Ugly

The Good: Earnings that were reported yesterday were great. While revenues missed estimates by $20 million at $1.17 billion, it was an increase of 17%. Earnings per share came in at $2.32 billion, beating estimates by $0.14.

In addition to the great earnings report, the stock is still beaten down from the previously mentioned E. coli outbreak 2 years ago. As Chipotle works to improve their processes, the stock should bounce back, making now a great time to buy at a discount.

The Bad: Even with great earnings numbers, there was one piece of bad news mixed in. Same store sales came in at 8%. The previous year this number was 9.7%. While this drop might not seem like a big deal, it actually is.

This is because the 9.7% was a soft number that analysts knew the company could hit. The fact that Chipotle is still seeing same store sales growth slow means they need to really start working on figuring out how to attract new customers and how to bring back long lost customers.

The Ugly: Investors and the company itself were hopeful that the E. coli outbreak was behind them. While there has not been another outbreak since, recently there has been other issues the company faced.

First, video surfaced of a store in Dallas infested with mice. And if that wasn’t bad enough, there was a Norovirus outbreak at a Virginia store that caused many people to get sick.

These two news stories reminded investors of that 2015 incident and many started to sell the stock again. And when news like this hits, it only hurts your attempts to bring more traffic into your stores.

What Does The Future Hold For Chipotle Stock?

So now that you know the good, the bad, and the ugly about Chipotle stock, what should you do as an investor? First, don’t panic. Second, take a long term look at the company.

They have a lot going for them. They have been able to increase earnings even with slower store traffic through cost cutting measures and a lack of promotions. This is important to note, seeing that avocado prices have jumped and they are a key ingredient in many Chipotle meals.

Additionally, the company is working hard to drive more traffic to its stores. As of now, they are adding new items to the menu, most notably, queso, which it hopes will entice customers to come in. Also, they are testing out drive thru service at some of their locations.

But with all of this good news, there is still the wild card of food safety. It appears that many managers have become lax in following policies and procedures, which is what led to the Norovirus outbreak.

If the higher-ups at Chipotle can get the managers in each store to be stricter when it comes to food and worker safety, the news of virus outbreaks should fade away.

Final Thoughts

Overall, I like Chipotle stock at the current price. I felt the stock was overvalued in 2015 when it was approaching $800 a share, but at $350 it has plenty of room to grow.

The company is focusing on keeping costs low and has a solid plan for growth, which should begin to show up in the coming quarters.

Finally, with the great earnings report, don’t be surprised if the stock pops over the next few days. You have plenty of time to get in before the price really starts to take off.

This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.