As I write this, shares of Chipotle Mexican Grill (CMG) are climbing after a J.P. Morgan analyst upgraded CMG from neutral to overweight. According to the analyst, Chipotle’s highly-publicized food safety crisis is nearly over, and that earnings will likely double in FY 2017.
J.P. Morgan’s sunny outlook has some investors loading up on CMG. But before you think about taking a bite out of this stock, you’ll want to read what I have to say next.
While Chipotle may be working hard to move past the E. coli and norovirus scandal, its near-term sales and earnings are still horrific. For the first time in its 10-year company history, Chipotle Mexican Grill is expected to post a loss. Some analysts even think that the E coli crisis has taken three years of earnings growth off the table.
This quarter, analysts expect Chipotle Mexican Grill to post a loss of $0.90 per share. This time last year, Chipotle earned $3.88 per share. Worse still, analysts have been aggressively cutting their EPS estimates for this quarter. Just three months ago, analysts were predicting a profit of $2.36 per share. The consensus is also that sales will fall 20%, from last year’s $1.09 billion to $869.6 million. That shouldn’t be a huge surprise, given that same-store sales plunged a shocking 26% in February.
Looking ahead to FY 2016, the consensus estimate is that sales will decline 3.3%, and earnings will plunge 59.3%. Those are not the kind of fundamentals you want to have in your portfolio.
So if you look at the latest analyst activity, J.P. Morgan is an outlier. Over the past month and a half, five firms have downgraded the stock, including Deutsche Bank, Goldman Sachs, Jefferies, Maxim Group and Wedbush.
And while CMG has lost over a third of its value over the past six months, it still isn’t a bargain buy. The stock still has a current P/E ratio of 30.3, and a forward P/E of 34.5. That’s well above the restaurant industry’s median current P/E of 23.7 and forward P/E of 18.7.
For these reasons and more, I consider CMG a D-rated sell. While it may be just fine to eat their burritos, I won’t be recommending CMG stock anytime soon.