I've spent years studying junk bond issuers, so I always get suspicious when I see a restaurant company, of all things, trading at high multiples of earnings, cash flow, or debt.
The restaurant business is notoriously risky, you see; there are few barriers to entry, fickle and economically sensitive consumers are at every turn, and it's extremely difficult to maintain high quality at any point on the price spectrum.
Still, it's not often you find a grossly overvalued (and overripe) company lying smack in the middle of the intersection of every single one of these very specific woes.
Yet that's exactly what I've found here.
In fact, I've just issued detailed trading instructions for profiting on this clunker to my Zenith Trading Circle readers, but this company is in such bad shape – such a perfect example of almost everything wrong with Corporate America today – that I had to let everyone know, so you can get the chance to profit now and later on if a similar situation unfolds again.
Let's have a look at what my research has turned up – so long as you've got an empty stomach…
This Company Was Ready to Fall Before It Poisoned Dozens
I had my eye on Chipotle Mexican Grill Inc. (NYSE: CMG) for a while – even before this fast-food darling suffered an E. coli and norovirus outbreak in the fourth quarter of 2015. Incredibly, the outbreaks hit restaurants in 15 states, well into the first quarter of 2016.
Such a far-reaching food safety problem indicated serious management and operational problems that struck at the heart of the business and sent customers fleeing.
Since then, CMG stock has fallen hard from its 52-week high of $632.98 per share, but is still trading at a ridiculous P/E of 150 times earnings.
Now, some Wall Street firms like Barclays are trying to tell investors that the multiple is a much lower but still exorbitant 40x "estimated" earnings for 2017, but even that is too generous a multiple for a company that slings fancy burritos – when it's not making customers ill.
I shouldn't even have to say this, but the market being what it is, and analysts being what they are, it bears stating: Restaurant companies should never trade at high multiples.
In recent months, half a dozen restaurant chains that issued high-yield bonds have filed for bankruptcy, which is absolutely typical of what happens in this industry.
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.