ZachStocks

At the risk of beating a dead horse (and possibly angering some readers that really like the stock) I’m going to have to reiterate my negative opinion of Chipotle Mexican Grill, Inc. (CMG). As a disclaimer I want to point out that my fund made some great returns last year holding the stock long, and I have enjoyed more than my share of their burritos and lime chips. But this year the stock has been a losing proposition, giving up over half of its market value this year and offering investors few reasons to expect better.

Wednesday after the market closed the company reported earnings of 74 cents per share for the second quarter.  The sales figures came in at 340.8 million compared to 274.4 million in the year ago period.  Although the revenue numbers were up 24% from last year, the reported number was below consensus expectations.  Adding insult to injury, management noted that they were seeing weakening trends in July as consumers began to tighten the belt (sorry, i couldn’t resist the pun).  It should be little surprise that the company is also grappling with higher prices for cheese and avocados (among other ingredients) which continues to add pressure to margins.

Bullish investors point to assumptions that the worst is now upon us and buying the stock at these depressed levels is akin to picking up quality merchandise at a 50% off sale.  However, there is likely to be further pain as the company has purchase contracts for rice, salsa, and soy oil expire during the fourth quarter.  That means food costs will likely ratchet even higher and this at a time when there is little chance for increased prices at restaurants.  If Chipotle were to raise its prices for burritos in the stores, traffic would likely begin to take a hit driving down revenue numbers.  The picture still remains challenging at best.

Looking at the stock, CMG is still trading at 25 times expectations for this year.  While that multiple is much lower than what we saw in January, the economic picture is also much bleaker.  Chipotle is definitely a leader within its industry, but unfortunately this appears to leave Chipotle as the strongest ship riding on a sinking tide.  Despite being a well run company with loyal customers, growth will likely continue to come in below expectations and the stock likely has further to decline before becoming a value.  

While taking partial profits is wise on a gap lower, I still believe the long-term picture is difficult.  That is why I will continue to hold a portion of my short position and look for opportunistic spots to add more exposure.

FD: Author has a short position in CMG

Additional Reading:

Trader Mark on CMG - The Bear Gets Them All Eventually

Anthony Mirhaydari - Casual Restaurants Burned by Inflation