A swift recovery at the markets on the horizon for Chipotle

Chipotle (NYSE:CMG) has been mired in controversy over the last few months because of reported E. coli outbreak in some of its restaurants. Between October and December last year 50 people reported to have picked up an E. coli infection, weeks after having eaten at various Chipotle restaurants. At the beginning of the 2016 no new infections have been reported and investigations as to what exactly might have caused the outbreak remains unknown. However despite the scandal Chipotle’s shares are up in the market.  The negative press is said to not affect the amount of consumers Chipotle will be receiving in the future. Many other well- known restaurants who have suffered in the past from E. coli outbreaks such as McDonald’s and Taco Bell, recovered well and did not suffer in the long run.

Concerning McDonald’s in 1982 it had to deal with an outbreak of similar proportions to Chipotle. However, shareholders in that same year saw their investment grow 13,000% and produce an annual return of 23%. Taco Bell in 2006 had an even bigger outbreak than that of Chipotle’s and yet the parent company's shares (NYSE:YUM) improved much over the next decade with share price increases if approximately 200%

According to Chipotle’s Q4 2015 results, sales were down from 8% up to 11% in December compared to the previous quarter of that same year and the company faced a loss of approximately $6 million to $8 million. Chipotle has also stated that earnings per share for the quarter would come in at a lower level, likely around $2.65.

Taking a look at Chipotle’s sales guidance, average sales per restaurant declined around 10%, thus many would assume it must mean lower revenues for the quarter of this year compared to the fourth quarter of last year. However this does not take into account a larger restaurant number: At the end of 2014 Chipotle operated 1763 restaurants; during 2015 this number grew by 220 to 1983, at an increase of 12.5 percent.

In terms of valuation, the company’s valuation may be lower than in the past, compared to the income generated by the company. With a trailing FCF multiple of 31.9 Chipotle’s free cash flow yield is above 3%, despite huge capital expenditures (for restaurant count increases).  The company’s high operating cash flows could enable Chipotle to operate new restaurants, signalling more growth for the company as well as repurchasing shares whilst the valuation is this low.

Chipotle's E. coli scandal went swiftly out as it went in and is already out of the media spotlight. The E. coli outbreak, if we were to judge by history, would also me out of the minds of Chipotle consumers soon. The company’s lower guidance for Q4 will still allow for growing revenues, and FY 2015 earnings should still come in 10% higher the number for 2014. The huge share price decrease provides a buying opportunity at historically low levels.

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