Buffalo Wild Wings and Chipotle Hit by Food Inflation

I mentioned in Tuesday's Chipotle Mexcian Grill (CMG) article:

Hopefully analysts will question on the conference call just how much the rising food inputs are costing them, and if they are passing it along to the consumer and in what degree. And if their forecast for future food prices are part of the reason they are guiding so low in 2008.

Looks like analysts are starting to catch on - it did not matter on Wednesday when the stock put on yet another 4%, but I could see this one setting up for a big disappointment (despite superb management) 2-3 quarters down the road as global forces/realities overtake even the best-managed company and expectations just get ratcheted to unreasonable levels in a momentum stock like this.

• A Banc of America Securities analyst raised his price target on Chipotle Mexican Grill Inc. on Wednesday, following higher third-quarter profit, but warned that rising food costs will temper future results.
• Barish has a "Neutral" rating on the stock, saying that the high stock price reflects these gains and his expectation that same-store sales may slow in 2008. Barish said food commodity costs remain challenging, and he is not sure whether higher menu prices can help offset that.
• Morgan Stanley analyst Mark Wiltamuth said Chipotle's stock price is "priced to perfection," and said the company has delivered so far on lofty expectations. Looking ahead, however, Wiltamuth sees food costs dragging on results, with higher corn prices causing a rise in higher beef and chicken costs. "With Chipotle facing higher food costs ... we do not expect a continuation of the explosive restaurant margin gains for 2008," Wiltamuth wrote.

Again, I've been bearish on this group for a few months now (Tough Times Ahead: Restaurants?) but cannot short individual names so am locked out of some profit opportunities. Such as....Buffalo Wild Wings (BWLD)

• Analysts said Wednesday that higher commodity costs are weighing on Buffalo Wild Wings Inc., after the restaurant operator's third-quarter profit missed Wall Street expectations.
• CIBC World Markets analyst Jeffrey D. Farmer cut his price target to $42 from $48, and said higher food costs are likely to persist in the fourth quarter and in 2008.
• RBC Capital Markets analyst Larry Miller reiterated a "Sector Perform" or "Hold" rating and lowered his price target by $3 to $40, warning that expenses related to new store openings and a rise in food costs will pressure results going forward.

If only there were an UltraShort Restaurant ETF - I'd be rocking. BWLD was down 21% today.

Disclosure: No positions

Comments

[CrossProfit]

BWLD has been featured on our homepage for over a month as being overvalued. CMG may hold out a while longer, but we agree, eventually will correct.

CrossProfit

[Moneytree]

Come on, not more of the same CMG bashing. This talk about increasing ingredient costs is not an issue. CMG is not BWLD.
Why is it every great stock like MCD MSFT DELL GOOG has to put up with the bashing from uninformed bloggers trashing their stock. Think about this, MCD had detractors for years and was always overpriced but 10,000 invested 30 years ago is now worth about two million, I know.

[CrossProfit]

Neither Trader Mark or us are talking about a 30 year time frame. The article and the CrossProfit evaluation is based on a 3 to 6 month time frame.

If CMG doesn't correct within the next 6 months by at least 20%, then you can say exactly how much 10k invested 30 years ago is worth today, without approximations. Better yet, perhaps you could tell us what 10K invested today in CMG will be worth in 30 years. We would all like to know!

We could be right and we could be wrong but we won't have to wait 30 years to find out. Chances are after the correction, we will be long again until such time that the stock gets ahead of itself again, if that is the case.

[Moneytree]

What will 10k be worth in 30 years? Who knows but look at their model. All top managers have ten yrs experience with MCD and know what mistakes to avoid. Costs go up, prices go up. This is MCD Mexican. You are saying the same things others said six months ago.
Where would you be if you shorted six months ago? My crystal ball says in 30 years CMG will be the stock you tell your grandkids you sold short in 07 and that is why they are in public school instead of Chote not to mention that almost trip to Paris.

[TraderMark]

Hi MoneyTree,

I like CMG for the long term. I think it has gotten ahead of itself. With that said it is not easy to stand in front of a freight train and many momentum stocks have destroyed shorts... once a company detaches from fundamentals does it matter if it trades at 60x forward earnings or 160x? Not really. It is still detached. Again I like this stock long term as it has a lot of expansion possibilities, and its management style if wonderful. With that said, at some point in every growth stock the pattern is, company continues to beat analysts over the head, analysts continuosly underestimate company - then analysts one day catch up and put a target that the company can only 'match' or 'mildy beat' - at that that time the momentum lemmings in the stock sell off in panic attack and stock can drop 30% overnight. I can cite hundreds of examples but if you want ones specific to "food/beverage&qu... one can go back to Panera Bread (PNRA), Whole Food (WFMI) or Starbucks. All great investments over the long run (as you mention); but if you get in late and chase you got destroyed in them. This is my point, you have a stock at 60x earnings when the rest of the sector is far below. Just like Whole Foods, was at a multiple nowhere in line with the rest, as was Panera.... and yes they had the same growth or very similar. Now in my opinion once this washout occurs, whether it be in 2 quarters or 4, it will be time to get long CMG again. Expectations need to get reset. Just my opinion. The stock has a LONG way to go up over the years, but in all stocks you mentioned they had periods where they fell or underperformed. I believe CMG might be in store for one of those - do you feel it should get a 70-80x forward earnings? Because to rise from here, that is what we will be asking the market to give it.

[AlanBrochstein]

I am short TXRH and was shocked that it went up so much in a relief rally. They too are being pinched - cattle prices have jumped. They typically lock in but have chosen not to do so. Still, they were able to give guidance for 20% EPS growth next year (mainly a function of openings). I thought it was funny that they could guide for next year but admitted later in the Q&A that they haven't decided on pricing next year.