Chipotle and Ackman Near Settlement, but Company Continues to Face Big Problems

Shares in beleaguered Tex-Mex restaurant chain Chipotle Mexican Grill (CMG)  rose more than 2% Friday following word from the company that it is close to reaching a settlement with an activist investor.

But an agreement with Bill Ackman won't make this stock any less toxic. Investors should stay away. 

Pershing Square Capital Management, the hedge fund run by Ackman, purchased a 9.9% stake in Chipotle in September. That made the fund the second-largest Chipotle shareholder, after Fidelity Investments.

Ackman is an activist investor famous for pushing drastic changes in the companies he buys, including forcing out board members and selling off parts of businesses. 

Since Ackman's purchase, Chipotle has reportedly hired the services of two high-profile investment banks, Goldman Sachs and Morgan Stanley, as well as law and public relations firms. The company wants to protect its business against potentially disruptive moves by Ackman and Pershing Square.

Ackman's activist stance has led him to big gains in the past. Lately, however, the investor has made several bad calls, including an investment in Valeant Pharmaceuticals and a short position in Herbalife. Recent news reports reveal that Pershing Square and Chipotle have been discussing changes to the burrito chain's board. A settlement on the issue would save Chipotle a long, painful and expensive public fight. Other shareholders, as well as analysts, have already expressed their dissatisfaction with the board and management, which haven't been able to win customers back after last year's food-borne illness scandal.

Some shareholders have even already filed for the ouster of CEO and founder Steve Ells, who they say has not provided the leadership required, as well as the marketing savvy, to resuscitate Chipotle and its shares.

Profit in the last quarter fell by a whopping 95% as same-store sales continue to decline at worse-than-expected rates, and shares are down by more than 30% in the past year.

Clearly, something drastic needs to happen to Chipotle for it to move past the E. coli crisis and bring value back into its troubled stock. However, with a less-than-stellar recent record of performance, it's unknown whether Ackman can be the one to fix the problems.

Continue to avoid Chipotle's stock for the time being.

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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.

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