How Deep is E. Coli's Impact on Chipotle's Stock?
Valuation multiple
So far in this series, we have covered Chipotle Mexican Grill’s (CMG) issues with its recent E. coli outbreak and how it could impact its same-store sales growth. We also saw how its same-store sales growth is the key driver for Chipotle’s revenue and how the more recent revenue growth trends have trickled down to the company’s EPS growth.
We saw how the EPS (earnings per share) growth impacts Chipotle’s valuation multiple and how it affects the company’s share price. The valuation multiple tells an investor if a company is trading at an undervalued or overvalued level, and it is used for making an entry or exit into a position.
Chipotle Mexican Grill’s forward PE
Historically, Chipotle Mexican Grill has traded at an average valuation multiple of 33.8x over the past seven years. As of this writing, Chipotle was trading at a valuation multiple forward PE of 36.4x above the company’s historical average.
In July 2015, Chipotle’s valuation multiple reached a high point of 39x and hit a low point of 27x in November 2015. So, the current valuation multiple is trading around the company’s midpoint and not at its recent lows.
The steep fall in the company’s valuation multiple resulted from the heavy selloff that followed the news of the company’s E. coli outbreak. To reflect the negative impact of the food safety incident, analysts revised their estimates downward, which brought the valuation multiple up again.
Previously, we saw that Chipotle’s share price moved in tandem with the company’s valuation multiple. Over the long term, a company’s share price moves lower with the valuation multiple moving lower and vice versa.
Panera Bread (PNRA) is trading at a valuation multiple of 30x, Domino’s Pizza (DPZ) is trading at a valuation multiple of 28x, and Starbucks (SBUX) is trading at a valuation multiple of 31.7x. The Consumer Discretionary Select Sector SPDR ETF (XLY) holds 3% of Starbucks as a percentage of its portfolio.
We will wrap this series up by looking at analysts’ estimates of the price target for Chipotle.
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