Selling Some Chipotle on Extreme, Obscene Strength

From Briefing.com:

Chipotle Mexican Grill/CMG reported a 75% rise in Q3 earnings, exceeding analysts' expectations, due to continued strong sales growth and operating efficiencies. The latest results prompted shares of the Denver-based fast food chain more than 3 percent higher in pre-market activity.

Since being spun off from McDonald's Corp (MCD) (this 'fact' is so wrong; when will CMG stop being mentioned as a spin-off? McDonald's had only an equity interest in the company, since sold. -- dmg), Chipotle has seen its shares soar. The stock has climbed more than 134 percent since the beginning of the year, and is up about 117 percent since mid-February, when we first recommended buying shares of the company. Despite consumer pressures and commodity cost inflation, which have weighed on many other restaurant companies, we believe Chipotle remains well-positioned for the long term given the strength of its operating strategies and active expansion plans.

For the third quarter, Chipotle posted a profit of $20.6 million, or $0.62 per share, up from $11.8 million, or $0.36 per share, in the year ago period. Revenue grew 35.5 percent year-over-year to $286.4 million, as more customers visited the company's restaurants. The results easily beat Wall Street's expectations. Analysts on average were expecting a more modest profit of $0.53 per share on $279.5 million in revenue.

Growth in the quarter was driven by a 12.4 percent increase in comparable restaurant sales as well as the addition of 28 new restaurants, including 26 restaurants in existing markets and and two in new markets. Despite higher food costs, restaurant level operating margins increased 150 basis points to 23 percent, due to efficiencies in labor. The addition of naturally raised meats in some markets led to menu price increases and also helped margins increase.

Based on the latest results, Chipotle sees comparable restaurant sales increases in the low-double digit range this year, and increases in the low to mid-single digit range in fiscal 2008.

Have no doubt: despite the extraordinarily outstanding performance Chipotle puts in as it repeatedly executes on all fronts, the shares sell for a nosebleed valuation. Some investors even argue the stock is priced for perfection. Akin to ISRG last week, I will seek the moment of extreme, obscene strength to lighten my position.

Full Disclosure: Long the shares of Chipotle Mexican Grill/CMG

Comments

[Moneytree]

At the risk of being called a zealot I take issue with your analogy that it is time to sell because the price is too high. My observation of past great stocks is they are always overpriced. MCD, AAPL, GOOG, MSFT, IBM, INTC and a long list of other great stocks. More than a few sold GOOG at $550.0 because it was too high and I suspect they are still waiting for the pullback. A $10,000 investment in MCD 30 years ago is now worth about two million.

[borisb]

i agree with your caution. the story thats driving the chart began a few quarters ago, the stock was basing in the 50s/60s and balloned to nearly 150. that might be all the "good but getting old story" is worth in the near term.

[borisb]

CMG continues to hang in there with a firm chart pattern. one explaination is that the 2008 earnings growing faster then sales will be $3.60+ or towards $4.00-ish. this plus the croud persepective being bullish might allow for a PEG of 1.5 , or a PE ratio of 50x... thus the shares would still have room to move towards $200.