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Don't Be Fooled: Chipotle and Under Armour Aren't Cheap

Chipotle Mexican Grill, Inc. (NYSE: CMG) and Under Armour Inc. (NYSE: UA) (NYSE: UAA) may compete in different industries, but the two stocks have been fellow travelers on the stock market throughout their histories.

Both companies were founded in the 1990s with disruptive ideas in their respective industries --Chipotle's was to serve real food fast while Under Armour focused on using high-tech in sportswear-and they debuted within months of each other. Under Armour had its IPO in November 2005, and Chipotle came on the market in January of the following year.

Image source: Getty Images.

The decade that followed was a bonanza for the companies and their investors. As the chart below shows, the two stocks were among the top performers during that period.

CMG data by YCharts.

Other than a couple of brief setbacks, both companies were breakout winners, posting steady revenue and profit growth the whole time as they gained market share and expanded their empires.

However, their fortunes changed after that point. 

CMG data by YCharts.

Since then, each stock has lost more than half of its value. Chipotle shares plunged after a notorious E. coli outbreak led to a customer exodus from the chain. The stock slipped again recently when a norovirus infection sickened over 100 customers and forced a Virginia store to close. Under Armour shares, meanwhile, sold off first on valuation concerns, and then dove on two consecutive quarterly reports that showed revenue growth slowing considerably, and it pulled back from a 2018 goal of generating $7.5 billion in revenue and $800 million in operating income. The company has suffered as sporting goods retailers have closed stores and as a resurgent Adidas (NASDAQOTH: ADDYY) has taken back market share.

A low price isn't always cheap

The sell-offs in each stock can make shares look cheap as prices have been cut in half for what are still strong brands despite current challenges. However, the perception that they're cheap is misguided as earnings have fallen sharply along with the share price. The P/E ratio, the most commonly used valuation method, has actually risen at Chipotle, while it remains elevated at Under Armour.

CMG P/E Ratio (TTM) data by YCharts.

The high P/E numbers indicate that investors continue to expect big things from these stocks. Mostly, they saw the current headwinds as temporary, but both companies still need to grow profits significantly in order to justify their current valuations. That's set up a downside to the stocks if their results disappoint, which was the case with their recent earnings reports as both hit four-year lows this week.

Don't call it a comeback

As each stock continues to languish, their challenges are proving more structural than many thought. Chipotle's sales recovery was already slowing last quarter as its two-year comparable sales actually fell, but things took a turn for the worse after the norovirus outbreak as management said that comparable sales were down 5.5% in the week following the incident. The news also demonstrated that Chipotle's safety protocols were not being enforced as they should have been since the outbreak was caused by a sick employee coming to work and spreading the infection. Management's reaction once again was flat-footed, possibly exacerbating the customer response.

At Under Armour, meanwhile, there were a number of concerning signs in its recent report. Footwear sales, which is the biggest product segment at Nike and Adidas, stumbled by 2.4%, and sales in North America, by far the company's biggest region, increased just 0.4%. While revenue surged in Europe and Asia, North America still contributes more than three-quarters of revenues. The company also reported a loss for only the second time in its public history and lowered its full-year revenue guidance. Adidas, by comparison, is growing much faster with currency-neutral sales up 19% in the most recent quarter and 26% in North America. 

The lesson here for investors is that the hoped-for quick comeback from each company is not materializing. Both Chipotle and Under Armour face structural challenges from within and stronger competition than they had before. The stocks could eventually recover their losses, but it likely won't happen for years.

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Jeremy Bowman owns shares of Chipotle Mexican Grill, Nike, and Under Armour (C Shares). The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.