Is it time to Consider Buying Some Chipotle?

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For Chipotle Mexican Grill (NYSE:$CMG) stocks, trading is less than $300, a rare occurrence which hasn’t been seen in the last five years. On Tuesday afternoon, the Mexican chain restaurant released a third-quarter earnings report, which, resulted in disappointed investors who were eager to sell. The following day the stock plummeted 15%.

However, despite the stockholder’s reaction to the report, the company has the potential to make a recovery through rebuilding its profitability over time.

Chipotle Data Summary

Last quarter, while comp sales growth came to a halt, Chipotle’s revenue growth slowed to 8.8%. A percentage of the increase was solely due to the revenue deferrals which was a result of their rewards program, Chiptopia.

The earnings per share surged to 155% and should have been at $1.33. However, due to unfortunate, surrounding circumstances, special charges incurred, making the share $0.64. Even with the consideration of incidences such as credit card fraud and the impact of Hurricanes Harvey and Irma, the average analyst estimate was still $0.30 below.

In 2015, Chipotle was faced with the daunting task of trying to recover after their food safety lapses. This was carried forward to the following year where their earning power was artificially depressed.

As of now the outlook for Chipotle is fairly subdued, experts anticipate the next quarterly report to show low single-digit comp sales growth. With that said, the company still display the potential for making a comeback.

Chipotle’s Plans to Bounce Back

Since the resolution of Chipotle’s initial safety lapses, upper management has chosen to focus on recovering their sales back to pre-crisis levels. Up until now, their recovery, attempt efforts, for increasing sales have fallen short. However, that is not to say that they cannot recover in the future. Two possibilities which would help in the process of recovery is, to develop and create new menu innovations and figure out a customer friendly digital platform.

Chipotle Stocks

Moving forward Chipotle has quite a few significant issues which need to be resolved. Just this past summer, a norovirus outbreak was linked to one of its restaurants. Shortly thereafter, another restaurant was plagued with a rodent infestation. Although the problems were taken care of, shortly after discovery, the damage to their customer traffic, was already done.

Assuming Chipotle has no more negative incidents, time will eventually allow for growth initiatives to take place once again. In addition, even if the average sales in restaurants are to remain the same throughout 2018, the operating margin should still improve by approximately 20% the following year.

Assuming the expected scenario of food costs remaining moderate and increased menu prices and rising labor costs, offsetting one another; just by having a 2.4 point increase in restaurant-level operating margin would boost EPS by about $2.50. With that fact in mind, purchasing Chipotle stocks may be a beneficial investment.

Featured Image: depositphotos/ jetcityimage2

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