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Chipotle’s Valuation Multiple Falls on New Food Safety Issues

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Valuation multiple

Due to high visibility in Chipotle Mexican Grill’s (CMG) earnings, we have considered the forward PE (price-to-earnings) multiple for our analysis. The forward PE multiple is calculated by dividing Chipotle’s stock price from analysts’ earnings estimates for the next four quarters.

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Chipotle’s valuation multiple

The recent food safety issues at a Chipotle in Sterling, Virginia, have prompted analysts to lower their EPS (earnings per share) estimates for the company for the next four quarters from $8.98 to $8.78. Analysts expect the new food safety issues to delay the recovery process and prompt the company to increase marketing and promotional expenses as Chipotle focuses on winning back its customers, which could put pressure on Chipotle’s future earnings. The food safety issues and lowered EPS estimates have made investors skeptical of Chipotle’s future earnings, leading to a fall in its stock price and its forward PE multiple. As of July 20, 2017, Chipotle was trading at 35.3x compared to 38.1x before the food safety reports on July 18, 2017.

On July 20, 2017, Chipotle peers Shake Shack (SHAK) and the Cheesecake Factory (CAKE) were trading at 61.7x and 16.8x, respectively.

Growth prospects

For the next four quarters, analysts have predicted that Chipotle’s EPS will rise 130%, which could have been factored into Chipotle’s current stock price. If the company fails to meet analysts’ earnings estimate, the selling pressure could further lower Chipotle’s stock price and its forward PE multiple.

You can mitigate these company-specific risks by investing in the iShares Select Dividend ETF (DVY), which has invested 37.9% of its holdings in restaurants and travel companies.

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