Decreasing Chipotle Traffic Could Spell Trouble

by: The Market Hick October 10, 2008 | about stocks: CMG / MCD    

The Market Hick

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

I am a hard core Chipotle (CMG) fan, let's get that straight right off the bat. I was eating at its first store on Evans Ave. here in Denver within their first year of opening (my girlfriend-now wife turned me on to the place). In fact I blame them for adding about 2 inches to my waistline! I took a lot of my friends there, they liked it and likewise have been hooked on those fabulous burritos.

I watched the chain grow by leaps and bounds and followed closely as it partnered with McDonalds (MCD) and later went public. I bought within in the first week of trading and subsequently added to my position in the next few weeks. I rode that stock to an incredible profit. However when I saw food costs rising and the subsequent price increases at their restaurants, I got out. Chipotle used to offer a great value with those $5 burritos, but when the prices started to head above $6 I sensed it'd lose a bit of momentum.

Now we see a stock that hit a high of over $150 trading at $51. Value investors might be tempted to get in at these levels, after all we have a good restaurant stock that practically defined the fast casual concept now trading at 21X earnings and 17X next year's with a PEG ratio of .88. If those are the metrics you use to judge a growth stock, fine. Those metrics have worked well in the past and might in the future, but I'm leery of buying any stock in today's environment based on future growth prospects. Further I believe that meaningful earnings growth will be hard to come by for the foreseeable future.

All those friends I have turned on to Chipotle serve as a great barometer of the company's business. We have noticed a marked slowdown of traffic when we go there, and it's not just here in Denver but across the Midwest and out to California (I have over 20 people who I survey). And it's the traffic that counts with any growing restaurant company. Granted we're not surveying every store and the survey is rather unscientific, but I'm a seat of the pants kind of guy and I trust my gut and what my friends are telling me. Quite a few of us bought into Chipotle when they first came public and the profits we made have bought a lot of burritos. We are still attentive to what we believe is a great business model and a well run company.

The question is how much to pay for a great business model and a well run company. In today's highly risk-averse environment the answer has to be: Not Much. I believe CMG will miss consensus earnings estimates for the third quarter by at least 2 cents and guide lower for the rest of this year and next (Current estimates call for quarterly earnings of $.60/ share on sales of $340 million). I believe that this will result in a PE compression to 15X this years earnings which will give us a stock price of ~ $35. Maybe then I'll take a look at buying back in, but until then I remain short the stock.

I do have to offer a couple of caveats to anyone considering shorting the company's shares:

  1. There are better short candidates out there for new money, notably in the financial sector (as if you need ME to tell YOU that!).
  2. Chipotle has a lot of cash and no long term debt to speak of, in fact it has enough cash on hand to pay off all its liabilities as of the quarter ended June. This company is not going bankrupt or to the market for an equity raise any time soon. When shorting stock in this environment, look for companies that have a good chance of insolvency within the next 12 months. My short position was executed last spring when commodity costs and menu prices were rising, and the financial environment was far different that it is today. At best I can only advise you to stay away from this one until a better price can be had.

Stock position: Short CMG.

Related Articles

This article has 6 comments:

  •  
    Oct 10 06:06 PM
    I'm not sure how you can write an artical and give stock advise by a "traffic report" of twenty friends put you do horrible research! A McDonald value meal is over $5 now a days and you think people won't pay $2 more for a Chipotle Burrito! They'll let anyone write investment news today...
    Reply | Link to Comment
  •  
    Oct 10 09:35 PM
    I've been eating at two stores in Greenwich Village for the past 1.5 years and business has been steady.
    Reply | Link to Comment
  •  
    Oct 10 11:46 PM
    I actually like CMG as a long after we establish a bottom. Quality food served fast with very high value for the dollar seems like a better bet than most restaurant stocks. I would put an peer group outperform but would be underweight the entire group until we reach a trading bottom in the broad market.
    Reply | Link to Comment
  •  
    Oct 12 12:26 AM
    I got burned hard on this stock...still think it is a great story and they have plenty of growth. I agree that you can probably get the stock cheaper, but shares are close to washed out down here and attractive for those with a 18-24 month outlook.
    Reply | Link to Comment
  •  
    Oct 14 04:04 PM
    Beverly Hills locations have lines out the door most weekdays especially with teens...2cents
    Reply | Link to Comment
  •  
    Oct 23 12:42 PM
    Hmm. The announcement that Chipotle is spending $100M of its $200M warchest to buy back shares has got to have crushed your short positions. I hope you and your 20 friends didn't put too much money on that bet - and I think CMG-B has the potential to reach $70 or $80 by year's end.
    Reply | Link to Comment
More Comments on CMG »
Top Rated Comment Streams:

Numbers are net rating-

See all Top 100 »
More by The Market Hick

Investment Resources
Money Management
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Short Ideas
Food & Restaurants
Apparel & Footwear
Department & Discount