Chipotle Mexican Grill Inc. (CMG) Stock Tanks Again - Don't Buy the Dip

Chipotle Mexican Grill Inc. (CMG) stockThe Chipotle Mexican Grill Inc. (CMG) stock price tanked again Tuesday after the company publicly questioned its own 2017 forecast.

And while some investors may be tempted to buy Chipotle stock on the dip, we advise against buying in...

Shares of Chipotle Mexican Grill Inc. (NYSE: CMG) dropped as much as 7.8% to $365.33 on the news Tuesday. The drop marked the stock's biggest decline since Oct. 26. The CMG stock price is now down 23.7% in 2016.

As the company works to recover from a widespread E. coli outbreak, it has lost focus on its once-stellar customer service. That has caused long lines at its restaurants, which has spoiled one of its former key strengths. It has also affected sales.

Because of the escalating problems, co-CEO Steve Ells said the company is now "nervous" about meeting its previous guidance for next year.

"I'm not satisfied with the rate of recovery," Ells said Tuesday at a Barclays Plc. investment conference. "I'm particularly not satisfied with the quality of experience in some of our restaurants."

Chipotle's same-store sales, a closely watched metric, plunged 21.9% last quarter. That was worse than the 18.7% analysts had projected.

Chipotle's troubles began in late 2015 when a string of food-borne illness outbreaks scared customers away.

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The company tried several promotions, including giveaways, buy-one-get-one deals, and loyalty programs, to entice customers into its chains. That caused many analysts to warn that all of the promotions would have a major negative impact on profits.

Ells noted that 2016 has been the most challenging year in the company's history. He explained that same-store sales are difficult to predict, making it harder for management to have confidence in its prior guidance. In October, Chipotle forecast 2017 earnings of $10 per share.

While some are buying on today's dip in the Chipotle stock price, we think that's a bad idea. Here's why we see shares continuing to fall...

Why We're Staying Away from Chipotle Mexican Grill Inc. (CMG) Stock

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A near-term Chipotle recovery is highly questionable.

The company confirmed it will need to raise prices to cover minimum wage increases. That comes as a restaurant recession is plaguing the sector.

Last month, Moody's Investors Service slashed its operating-profit growth forecast for the restaurant sector and revised its outlook to stable from positive. The ratings agency now expects operating profit to grow 2% to 4% in the next 12 to 18 months. That's down from a previous forecast of growth of 5% to 6%.

Without question, restaurant traffic is slowing...

Traffic at U.S. fast-food restaurants fell 1% in Q3 to mark the sector's first traffic decline in five years, industry tracker NPD Group said Tuesday.

Total restaurant visits were also down 1%. Factors such as the higher cost of eating out, changing customer behavior, and higher rent and prescriptions have caused people to cut back on eating out.

A recent NPD survey found 75% of respondents said they've reduced their number of restaurant visits as they keep a closer tab on overall spending. Many said restaurant prices are too high.

Chipotle shares could get a mild boost from activist investor Bill Ackman's involvement and a board shakeup. But Money Morning remains skeptical that Chipotle has enough momentum to overcome its internal issues and the mounting external challenges. We continue to avoid CMG stock.

At $365.68, CHG stock is down 23.79% year to date.

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