Sometimes some of the best franchises never really go on sale, so when they get hit with an exogenous, temporary shock such as what is currently happening with Chipotle (CMG), we pay very close attention.
In our view, the market is over-reacting to transient E. coli scares that are helping to mark down the company’s equity to more palatable prices for interested “new money.” Chipotle’s shares still aren’t terribly cheap on the basis of our discounted cash-flow process, but we simply can’t ignore the price fall, which has sent the burrito-making giant’s shares under $500, breaching through our fair value estimate to the downside – remember, the Valuentum process first requires a firm’s equity to bottom, form a base and then turn upward for consideration (we’re not quite there yet).
Though we’re sorry to hear anyone get sick, we’re pretty excited about Chipotle’s shares potentially offering investors a gift at “present” prices. Time and time again we have seen restaurants bounce back from transient dynamics – Yum! Brands’ (YUM) KFC in China (bird flu, poultry sourcing), McDonald’s (MCD) “unhealthy” persona – and, from our perspective, the consumer tends to have a very, very short memory, always returning to the brand. Remember Supersize Me? Chipotle is a fantastic, resilient organization.
To think that Chipotle can’t improve both sourcing and marketing to restore a positive perception over the long haul just doesn’t make sense, in our view. It seems, to us, that many aggressive-growth, technically-oriented investors are jumping ship as the company’s metrics will likely fall short of what might pass muster in the near term. This may mean the stock could be under pressure for some time longer still, but it also means that there is a growing likelihood shares are being overly punished. This could be a fantastic development for investors looking to hold shares for a very long time.
Though just one of billions on this planet, I ate at the local Chipotle this week with no fear, and I continue to have no concerns about the restaurant’s food quality at all. More than half of respondents to a CNBC survey don’t agree with me, but the negativity will inevitably fade (as it always does), and customers will come back. Chipotle has become a staple in many urban-oriented environments and the go-to place for fast-moving executives and millennials alike. This may not be a popular statement, but we’re going to have logic win the day on this one: with “five people in three states” getting sick “on top of 53 known cases from a prior outbreak” (58 in total), the math equates to odds closer to one in a million people getting sick. One in 10 million? One in 100 million? Chipotle serves an incredible number of guests in a given day.
The media is doing what it does best and blowing the story out of proportion. Our fair value estimate of Chipotle is $540 per share, and while this implies only modest upside potential at the moment, there may be more sledding in shares to come as aggressive growth, quarterly-earnings-chasing money managers jump ship, handing what we would consider to be a gift for longer-term investors seeking incremental restaurant exposure in the wake of ultra-low prices at the pump. We’re starting to get interested in a position in the Best Ideas Newsletter portfolio, even as we note there may be a better price yet.
We’re being patient but we wanted to put this one on your radar pronto.