Shares in Chipotle Mexican Grill, Inc. (NYSE:CMG) popped by 12% in overnight trading, adding $850 million to the company’s market cap, after it hired Taco Bell CEO Brian Niccol to be its new leader.
It was clear why the man at the Yum! Brands Inc. (NYSE:YUM) unit known for Doritos-flavored tacos would want to run his own show. It’s unclear, however, how can clear up problems that stem from Chipotle operations.
But speculators were hearing none of that, instead dubbing it ignoring the fact that Taco Bell’s rise began under Niccol’s predecessor, , now the CEO of Yum!.
The question, as morning dawned, was whether Niccol is more than an overnight sensation.
Can This Burrito Be Saved?
Chipotle’s ongoing problems with foodborne viruses are well documented, but it has already begun to recover financially.
The company reported in its most recent quarterly report, with operating margins of 14.9% and net income of $43.8 million. Some of that was the result of the Trump tax cut, but $1.34 per share seems to have been earned. Operating cash flow last quarter was over $467 million.
In response, the company handed cash and stock bonuses to employees , as well as new benefits and accelerated training programs. It was the last act of founder and outgoing CEO Steve Ells, who got 14,000 shares of stock in his compensation package last year — stock which gained .
Most of Chipotle’s revenue gains, however, came from opening new restaurants. Same-store sales were up less than 1%. The company, however, has over $2 billion in assets, no debt and over $500 million in cash and other short-term assets, with which Niccol can work.
In short, this burrito can indeed be saved. Is Niccol the man to do it?
The Niccol Record
Most of Chipotle’s problems involve
, a focus on fresh ingredients and in-restaurant prep that may frustrate efforts to add new items to the menu.
calls him a social media leader who made Taco Bell a “lifestyle” brand and introduced technology like mobile ordering. He only joined Taco Bell in 2011 and started his career at Proctor & Gamble Co. (NYSE:PG).
One thing he could do quickly is expand business hours, which now start around 11 AM, with , a huge favorite in Texas that uses scrambled eggs, potatoes, beans, meat and cheese inside flour tortillas. That would be an operational challenge, however, as the stores are busy every morning doing prep for lunch and dinner service, but it should be possible.
Some reporters have also suggested adding mixed drinks like margaritas to the menu, where that’s legal, but it’s more likely Niccol will first focus on . The things he did at Taco Bell.
The Bottom Line on CMG Stock
Chipotle’s fall from market grace has left it with a trailing price-earnings ratio of 40 and a price-sales ratio of a little better than 1. Yum! by contrast sells at about 21 times earnings and has a price-sales ratio of 4.
The cost of buying Chipotle stock is no longer unreasonable. It may even be a speculative buy because Niccol may not have much time to execute. Pershing Square owned they’re still sitting on a loss and a turnaround in the stock price followed by a quick sale could be in Chipotle’s future.
is a financial and technology journalist. He is the author of the historical mystery romance , available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at . As of this writing he owned no shares in companies mentioned in this story.
