Chipolt-Away: From Burritos to Burgers?

03/31/2016 9:50 am EST

Focus: STOCKS

Michael Berger

President & Founder, Technical420.com

After Chipotle Mexican Grill filed a trademark indicating plans to enter the burger business, Michael Berger, President of Technical420.com, expresses doubt about the company’s ability to maintain a premium valuation.

Chipotle Mexican Grill (CMG) has seen its share price plunge 28% during the last year and we think shares have more room to fall.

Although Chipotle should be focused on to serve safe burritos, the Mexican food chain recently filed a trademark application for a new restaurant chain called Better Burger.

Expected to Report First Loss Since IPO

In late April, CMG will announce earnings for the first quarter of 2016 and we expect to see the company report a loss of more than $1 per share.

In mid-March, Chipotle said that they expect to report their first quarterly loss since it went public in 2006. Management made this announcement after the company reported that sales declined by 36% and 26% in January and February, respectively.

More Trouble than Wall Street Thinks

Chipotle has its hands full with a major PR crisis stemming from a series of food safety incidents linked to consumers who got sick after eating at their restaurants.

In mid-January, the restaurant chain announced a free burrito giveaway in an attempt to bring customers back. If free food is the backbone of Chipotle's strategy to lure back its loyal customers who dine at least 25 times a year and account for up to 20% of sales, then CMG is in more trouble than Wall Street thinks.

It is going to take more than a free burrito for Chipotle to gain back the trust of its loyal following. The company used to receive a premium valuation from Wall Street for having a cult like following. Chipotle faces a long road to recovery because bringing back those loyal customers will take time and CMG’s stock price will suffer.

Short Target

Earlier this week, Wedbush Securities said that Chipotle won’t recover sales lost from the norovirus and E. Coli outbreaks until 2018… and that is the best case scenario.

Wedbush downgraded CMG to underperform and lowered its price target to $400 from $450. Wedbush also said that Chipotle is facing other headwinds which will affect earnings. These include labor and other operating expenses, which had increased during the first quarter.

For the reasons outlined above, we view CMG as a great short opportunity as we get closer to earnings.

By Michael Berger of Technical420.com

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