A Turning Point For Chipotle But Is It For The Better?

The End Of An Era, The Dawn Of A New Age

Chipotle Mexican Grill (CMG) has had its share of ups and downs. Once the darling of a growth-hungry market the chain suffered greatly with an outbreak of food-borne illness and has since recovered. Now on track to fulfill its former promise, the company has announced some news that may change everything.

Chipotle founder, former CEO, and Executive Chairman of the Board is giving up his role. Steve Ells has stepped down from the board allowing current CEO Brian Niccol to take over his spot. What this means for Chipotle is ultimately unclear but the signs are good this company will continue to make headway with its long-term growth strategy.

“Brian has proven that he is absolutely the right person to lead Chipotle forward and I’ve never been more confident about the future of this great company,” Ells said in a statement. “I am especially grateful to the employees and our valued customers over the last 27 years who helped make Chipotle the unmatched brand in fast-casual dining it is today.”

Ells founded Chipotle in 1993 in Denver, Colorado and has been in an executive role ever since. He came under fire during the food-borne illness scandal and relinquished his role as CEO because of it. Since then, he’s guided the company is the Executive Chairman role; until today that is.

Chipotle Is Still In Good Hands

CEO and now Executive Chairman Brian Niccol took the reins at Chipotle early in 2018. His mission, to reinvigorate a brand that had gone stale. The problems were numerous, the company’s struggles with foodborne illness the previous two years only the tip of the iceberg. Niccol hails from Taco Bell (YUM) and is largely responsible for that brand’s turnaround so it was an easy match to make.

His strategy was simple. Modernize the company across all aspects of the business effectively rationalizing the brand on a nationwide basis. The focus on apps, loyalty programs, and marketing helped drive traffic. The company had been struggling in that area as it had been relying on old fashioned forms of media and word-of-mouth advertising. He accomplished this by bringing on new talent including many faces once seen in the halls of Taco Bells’ e-suite.

As for the tacos? Niccol’s focus was on three things. The first was introducing delivery and curbside pick-up options using, you guessed it, apps and mobile. The second was slowly introducing and testing new menu items, a process that brought us Carne Asada. The third was streamlining operations to lower costs while facilitating new items and curbside/delivery services.

This Company Is Growing, And Fast

Chipotle Mexican Grill has been growing over the last two years and the outlook for growth is excellent. The company posted $5.58 billion in revenue for 2019 and the consensus is a two-year CAGR in the range of 12%. Looking beyond that, revenue growth is expected to continue accelerating by solid double-digits until at least 2025. Until then investors will enjoy EPS growth comparable to revenue gains and the knowledge a capable leader is driving the results.

Analysts at William Blair upped Chipotle to Outperform from Marketperform citing the company’s resilience in the face of the spreading coronavirus. They also point out a “more palatable” valuation now the broader market has entered a correction. Now trading at roughly 39X next year’s earnings this stock is lightly valued considering a double-digit five-year CAGR. To answer my own question? I don’t think Ells stepping down makes a bit of difference, Chipotle is already on the right track and the man driving the train is still at the controls.

The Technical Outlook: Oversold And Underloved

From the technical perspective, CMG shares are in a multi-year uptrend and correcting. The coronavirus-correction has shaved 25% off of the recently set all-time high. At today’s prices the stock is trading back at levels not seen since last year and the breakout to new highs took place. In other words, the stock is trading at a potentially very key support level.

The indicators are mixed. Momentum is bearish but there is a caveat, MACD is diverging from the newest low and suggests a relief rally is building. Stochastic is also bearish but showing one of those signals that are hard to read. If you think CMG is moving lower stochastic is firing a bearish sell-signal. If you think a rebound is brewing, as I do, the stochastic is set to fire a bullish crossover that I would consider to be a strong-buy inlight of the MACD divergence and longer-term uptrend.