I wrote this on the RB boards:
I had conducted a survey (over at SA I think) a few months ago on CMG stock price, and I believe there were some members who had even voited that the stock could go down to $250. I can’t imagine it going there because it is still my favorite restaurant. But I sold out of this between $560 and $600, watched it go down to $400 and then back up above $520 and now back to $440. What a ride! I am glad I am out, because such volatility is injurious to my health. Especially since the position I sold was about 12-16% of my portfolio.
I think I am prepared to get back in, fully knowing that this could go down further. I never once doubted that CMG will eventually recover and resume its growth. When this first occurred in Nov, my initial estimate based on similar issue with TacoBell was a 1 year recovery. It is quite possible that we might get a recovery of the business within a year. But who cares whether it is 1 year or 18 months? It matters a little but not a whole lot. Near term cash flows do get affected. Stock value is present value of its future cash flows. Near term cash flows carry more weight than long term cash flows. But it was selling over 35 times when it was at $600 and the trailing 12M EPS was 16.84.
2016 EPS estimates have been dramatically lowered to around $6.50 (I am not surprised, but this time it appears analysts overshot on the downside, just like their estimates for 2016 in early jan at around $13 was probably overshot on the upside).
Regardless, I believe CMG will return to normalcy, which means EPS over $16.50 and then growth related to new restaurants will eventually bring the EPS above $20 by 2018 or 2019. At $20 with 35X multiple or even higher as growth resumes, we can see a $700 stock.
Please advise what am I missing? Do you expect their profitability to improve or be hurt due to food safety measures? I think in the long term it improves, as they will move out certain tedious operations like chopping tomatoes for salsa out of the store into a central kitchen, which could improve productivity actually.
Also longer term, they have growth levers such as more aggressive catering, breakfast, hopefully Shophouse or the burger chain at some point, all potentially adding to a lot of upside.
We no longer have to perform some crazy math like I used to (using FCF and removing capex to assume steadiness in long run) to justify the high valuation. Current valuation can be justified by plain old Forward PE which frankly assuming $20 in 2019 is not that insane at 22 or 23.