Chipotle Isn't Looking to Compete With McDonald's on Price, and Why That Could Be a Costly Mistake

**Chipotle Mexican Grill **(CMG 1.53%) stock has been struggling over the past year, falling by 33% in value. The fast-casual restaurant chain has normally been a stellar growth stock to own, but that hasn’t been the case of late. Its growth rate has been slowing as consumers have been scoffing at its high-priced menu items.

Management, however, doesn’t appear prepared to sacrifice margins in exchange for revenue growth. CEO Scott Boatwright isn’t interested in offering a value or dollar menu option like McDonald’s, and says that, “our food is worth, in my mind, every penny we ask someone to pay for it.”

It’s a controversial move and claim, particularly at a time when consumers are strapped for cash and looking for deals. And it could end up hurting the stock.

Image source: Getty Images.

Chipotle needs a growth catalyst

The problem with Chipotle is that consumers don’t appear to be seeing the same value in its product offerings that its CEO appears to see. While the restaurant chain believes it offers value, the results speak for themselves, with consumers not flocking to Chipotle restaurants of late. Its growth rate has been declining in recent quarters, and it’s well below its five-year average.

CMG Revenue (Quarterly YoY Growth) data by YCharts

The CEO may believe there’s excellent value in the menu, but in doing so, he’s effectively ignoring what the customers and results are effectively telling him. And the danger for Chipotle is that if it can’t find a way to win over consumers, this trend may continue, making the stock an even less enticing option for growth investors. It certainly doesn’t help that this is already a highly priced stock to begin with.

Why Chipotle’s decline may continue this year

In the past, investors have been willing to pay a premium for Chipotle’s stock due to its impressive growth. But if the growth rate continues to be in the single digits, it’ll only get more difficult for the stock to rally. Right now, shares of Chipotle are trading at around 32 times the company’s trailing earnings. That’s well above the **S&P 500 **average of 25. At that kind of a premium, investors are likely looking for much more growth than what the company has been delivering thus far.

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NYSE: CMG

Chipotle Mexican Grill

Today’s Change

(-1.53%) $-0.57

Current Price

$36.65

Key Data Points

Market Cap

$48B

Day’s Range

$35.62 - $36.77

52wk Range

$29.75 - $58.42

Volume

9.8M

Avg Vol

18M

Gross Margin

22.35%

Although the stock has declined significantly over the past year, it’s still an expensive buy right now. Without stronger growth prospects, the stock may continue to struggle as the year goes on. Chipotle may be trying to protect its margins, which is admirable, but if it wants to continue being a top growth stock, it may very well need to be more competitive on price. And with the company not interested in taking that option right now, I’d steer clear of the stock as Chipotle may be headed for some even tougher quarters ahead.