Chipotle (NYSE:CMG) reported strong first-quarter results, and its digital sales have soared during the outbreak of the novel coronavirus. While the latter trend is likely to continue, the company is relatively poorly positioned for the current recession. Moreover, the valuation of CMG stock is quite high. Consequently, I recommend selling the shares at their current levels.
Chipotle’s Q1 earnings per share came in at $3.08, way above analysts’ average outlook of $2.66. The company’s revenue, which jumped 7.6% year-over-year, was slightly higher than analysts’ mean estimate. In the first two months of Q1, before the crisis his the U.S., Chipotle’s comparable sales jumped 14.4% year-over-year.
The chain’s digital sales in the period soared 81% YOY. Moreover, about 15% of its customers had burritos and bowls delivered to them for the first time in the last two weeks of March.
Chipotle CEO Brian Niccol said he expects the company’s digital orders to continue to be strong going forward. “We believe this will have a lasting benefit well beyond the current crisis,” he told participants on the food purveyor’s post-earnings conference call.
That makes sense; after all, people are “creatures of habit,” as the well-known saying goes. As a result, I believe that Chipotle online ordering will continue to be strong. At the same time, I think that the company, like all of its peers, will benefit from most states allowing restaurants to reopen in the coming weeks and months.
Poorly Positioned for the Recession
But from my younger days and my (relatively few) visits to Chipotle’s restaurants, I remember that the chain appeared to be most popular, by far, among those between the ages of 16 and 30.
Unfortunately, that’s the demographic most likely to be hurt by the current recession. Many restaurants, movie theaters and bowling alleys will go out of business, causing tens of thousands of high school and college students, along with many in their early 20s, to lose their jobs. Meanwhile, junior employees of many businesses, including car dealerships, newspapers and oil companies, will also join the ranks of the unemployed as a result of the downturn.
Consequently, many of Chipotle’s fans will have to switch to cheaper choices, like McDonald’s (NYSE: MCD) and Yum Brands’ (NYSE:YUM) Taco Bell, Pizza Hut, and Kentucky Fried Chicken. Of course, for those who are still vulnerable to and/or worried by the coronavirus, Domino’s Pizza (NYSE:DPZ) will continue to be a popular option. Domino’s, of course, has always specialized in delivering its food to your door.
High End is a Better Choice
Many of the highest-paying sectors, including Wall Street/finance, healthcare, tech, and government, have been largely untouched or even helped by the crisis. As a result, high-end restaurants should do pretty well once they are allowed to reopen.
Among the stocks in this category are Darden Restaurants (NYSE:DRI), which owns Olive Garden and the Longhorn Steakhouse, The Cheesecake Factory (NASDAQ:CAKE), and Brinker International (NYSE:EAT), the owner of Chili’s and Maggiano’s.
Valuation and the Bottom Line on CMG Stock
CMG stock currently sports a huge forward price-earnings ratio, based on analysts’ average 2020 EPS estimate, of 93. By contrast, the forward P/E multiples of McDonald’s, Yum Brands and Domino’s are 28, 25, and 36, respectively; Darden, The Cheesecake Factory and Brinker are 13, 6.6 and 3, respectively.
I know that Chipotle had been growing quite rapidly and impressively before the recession. But given how expensive CMG stock is and the large hit that the burrito maker will likely take as a result of the economic downturn, I recommend selling the chain’s shares at this point. I believe that the lower-end and higher-end restaurant stocks will weather the current recession much better than Chipotle will.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business daily, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.