Why Chipotle's Stock Isn't Going to Plummet 20%

NEW YORK (TheStreet) -- Barron's is out with a new report (paywall) describing why Chipotle's stock could fall 15% to 20% from its current levels, but that assessment may be too dour.

According to Barron's, stubbornly high costs for hormone-free beef and a lingering shortage of responsibly raised pork have caused investors to sour on Chipotle's profit potential this year. And those concerns about product supply and prices have sent investors fleeing a stock that has been one of the market's hottest for the past two years.

Shares of Chipotle, which were trading on Monday at just over $600, have shed about 17% since reaching a 52-week high on Jan. 18. Citing investors, Barron's pointed out that Chipotle shares could dip to $500 in the next few months if sales and profit growth don't return to their blistering paces of the past.

The appetite to own Chipotle shares may be lukewarm right now, in part due to red-hot activity in the restaurant IPO market. Wingstop (WING), Fogo De Chao (FOGO), Bojangles  (BOJA) and Shake Shack (SHAK) have all pulled off wildly successful IPOs this year, attracting institutional investors searching for the next Chipotle in terms of growth potential. As a result, those deep-pocketed investors may have decided to dump shares of Chipotle to chase something sexier.

But investors may be forgetting several important things Chipotle has working in its favor.

The first is a looming boost to revenues from a nationwide price increase set to go into effect by the end of the third quarter. Chipotle has estimated the increase, which will compensate for beef price inflation, will be in the range of 4% to 6%.

"We're just not charging the going rate, we actually lose money anytime somebody comes in thinking about getting chicken and instead gets steak for example -- so we'd like to fix that," said Chipotle CFO Jeff Hartung on the company's first quarter earnings call April 21.

In last year's second quarter, Chipotle implemented an across-the-board menu price increase of about 7% as it dealt with rising costs for beef, dairy and avocados. Same-restaurant sales growth accelerated soon after the menu price increases went into effect -- after rising by 13.1% in the first quarter of last year, same-restaurant sales increased an average of 17.7% in each of the remaining three quarters. 

Shares of Chipotle surged thereafter, rising 52% from April 30, 2014, to their 52-week high on Jan. 8, 2015.

Another important factor is the imminent end to the pork shortage that has weighed on Chipotle's sales for months.

"We have not started receiving pork from the new supplier yet, but should start to see that in the system in the coming weeks -- that should allow us to start rebuilding and get us back to having pork everywhere this fall," Chipotle spokesman Chris Arnold told TheStreet via email on May 29. Since then, TheStreet has visited several Chipotle locations in New York City on various occasions and has seen "no carnitas" signs removed from the service counter, indicating pork supply is coming back online as planned.

The pork shortage weighed on same-store sales in the first quarter, though Chipotle still achieved a strong increase of 10.4%. Hartung explained on the April earnings call that the combined effect of bad weather and the pork shortage could have hurt same-store sales growth by as much as 1 to 2 percentage points.

But the popular item coming back to menus across the country should mean more sales for Chipotle.

Finally, the Chipotle brand remains wildly popular among teens and millennials. A simple search of "#Chipotle" on social media sites such as Vine, Instagram and Twitter will result in a drumbeat of comments and photos by people professing their devotion to the brand, which is known for generous portion sizes and friendly customer service.

Doing the same for McDonald's (MCD) usually leads to sharply different assessments of brand perception. In fact, in Piper Jaffray's latest Taking Stock With Teens Survey, teens from average to upper income households voted Chipotle their second-most preferred restaurant, behind Starbucks (SBUX).

Further, in a recent survey conducted by the American Consumer Satisfaction Index, Chipotle ranked No. 2 behind Chick-Fil-A in customer satisfaction among full-service and limited-service restaurants. For the sixth year in a row, McDonald's was voted last in customer satisfaction.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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