This
week I was asked to look into Chipotle (CMG), and this is actually a good stock
to look at due to rising grain prices over the last couple months. For those who are not too familiar with
the company, Chipotle operates almost 1300 Mexican restaurants throughout the
US, Canada and a few locations in Europe.
Most recently they opened their first Asian restaurant, Chopshop, in hopes
of becoming as big as their Mexican cuisine. As of today’s close at $398.06, Chipotle is currently up
almost 16% for the year, but is 11% off all-time highs of $442.40 put in back
in April.
Among
the many things I like about this $12.6B company is that it has a terrific
management team that has built an outstanding balance sheet. The company currently has a little more
than $450M in cash to only $3.63M in debt, giving it $14.66/share in cash. Last year operating margins came in
slightly below 16% and revenues were $2.4B. Now, at its current price, Chipotle is trading at 36x FY13
earnings. While the P/E is
relatively high compared to competitors Panera Bread, McDonalds, Yum and
Buffalo Wild Wings, it’s actually a discount from its’ average P/E over the
last 5 years of 40. Analysts are
currently expecting CMG to earn $8.89/share in FY12 and $11.10/share in FY13,
good for a 23% and 25% YOY increase, respectively.
On
a technical basis, Chipotle is really in “no man’s land” at these prices, where
I would not want to initiate a new long position or short position in the
stock. When I buy and sell stocks,
I trade around key technical levels (Fibonacci’s, floors, resistance levels,
trend lines, etc…). The 78.6% Fibonacci
retracement from the 52-week high ($442.40) to the 52-week low ($271.53) is
$404.96, just 1.5% above today’s closing price. Unfortunately, this doesn’t give a hint as to whether the
stock should go higher or lower.
Instead, the resistance level that I’m looking at for CMG is at $420 and
the floor is the 61.8% Fibonacci retracement of $375.56. So, you’re really looking at a 5.50%
upside to a 6% downside. Those are
not the kind of odds that I like. Additionally,
Chipotle traded right up to the 50-day moving average of $399.27 and failed to
close above it, which means even at these levels, there is significant selling
pressure. While I am bullish this
stock, I need it to pull back before I can recommend buying.
Analysts
are currently mixed on what to do with Chipotle. With an average price target of $445, there are 9 buys, 14
holds and 3 sells on the stock going into tomorrow’s earnings report. Unless you want to take a big chance,
DO NOT trade this stock until after their earnings come out tomorrow after the
close. Analysts are expecting
Chipotle to earn $2.30/share, but I’m actually looking for $2.33/share, both of
which I think will not be a problem.
What I am interested in hearing is how commodity prices are going to
affect them in future quarters. I
think Chipotle will be just fine even with corn prices at 10-year highs. What will aid them is meat prices have
dropped dramatically over the last few months, which should offset any rise in grain
prices. I’m also looking for
Chipotle to talk about new locations for Chopshop and do not want to hear
anything about unfavorable currency rates since this is mainly a US based
company.
As
I wrote a few weeks ago, I expect more than 75% of S&P 500 companies to
beat earnings estimates, and I see no reason Chipotle disappoints
tomorrow. The only bad thing about
that is the stock tends to rally between 5-6% on beats, meaning come Friday
morning, CMG could be trading at $420.
The good news is that if Chipotle’s net income comes in low, the stock
should sell off closer to that $375 level, at which point you should buy it
aggressively and stop yourself out at $370 on the downside, which would be the
lowest it has traded since early February. My long-term (12-18 month) price target for Chipotle is
$465, which would be a 17% gain from today’s close. With that being said, I still cannot recommend buying this
stock until it sells off closer to $375, and certainly not before they report
earnings after the close tomorrow.
Full disclosure: I closed out my short
S&P puts today as I got about as much as I could from the option. I am currently long AAPL, SBUX, HD and
NKE through calls.
Jeff Lewison
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