Chipotle Should Bounce Following Weak Report

Chipotle Mexican Grill (NYSE:CMG) is getting defended by several firms this morning after missing estimates last night:

- Baird is upgrading CMG to Outperform from Neutral based on positive view of internal fundamentals and valuation; would use expected weakness related to Q4 results as buying opportunity; believe 2008 EPS estimates have upward bias, even if difficult macro backdrop continues; consider valuation (prospective NTM P/E 35X; PEG 1.2X) attractive for powerful long-term growth story with robust operating trends. Reiterates $140 target.

- Piper Jaffray reiterates their Buy and $200 (!) target saying that should the market penalize the company for 60% earnings growth (i.e. stock is trading down after market following in line results) they suggest investors use the pullback as a buying opportunity.

Despite difficult market conditions, Chipotle continued to (at least) meet expectations as fourth-quarter earnings increased 59.6% to $0.53 per share; in line with PJ's estimate. Restaurant profit margin increased 210 bps to 22.1% due primarily to the company's ability to effectively manage expenses as well as sale leverage, or the 10.6% same-store sales result.

- Cowen vigorously defends CMG shares on likely weakness this morning after CMG posted '+$0.04 better-than-they-expected' 4Q07 EPS of $0.54 (ex. $0.01 charge) vs. their $0.50E and in-line with management's inference at The Cowen and Company Consumer Conference that "4Q07 EPS growth will likely be about in-line with current Consensus' $0.54E'). The headline here is 4Q07's EPS performance of $0.54 was CMG's best operating quarter of 2007 and any model to the contrary is simply intellectually challenged.

As such, they would view a sub-$100 CMG share-price open today as an historic buying opportunity for 'the next 5,000+ unit global restaurant company' at such an exciting, early stage in its development.

Notablecalls: What can I say? Buy the stock. It's going to bounce. I would not be surprised to see $100+ level as soon as today (the stock traded as low as $92 in after hours action).

Note there's a 40%+ short interest in the name. The shorts will probably not attempt to chop it down but rather use the weakness to cover. The stock is down from $150.

Disclosure: no position

Comments

[BettyBlowtorch]

New unit volume declined double digits. Estimates for 2008 are still very aggressive. At least the drug addled $2.85 estimates for next year should go away.

This was the first miss (though Piper claimed it was in line) after beating estimates by huge margins in all prior quarters. A great company but sell into the bounce and buy it at $80 in a month or two.

[Tom B]

I like Chipotle as a user and deeply respect Piper Jaffrey-- the best analysts in the biz-- but CMG 's got a super high P/E for a restaurant, IMO.

[DanielJacome]

They are using labor efficiencies and modest menu increases (1.5-3%) to offset higher ag costs. Corn is feed for chicken and both prices for those inputs have popped like a basketball released from underwater. We would pick up CMG down here. If 100 is resistance, buy @ 80, but there is a lot of $ on the sidelines that is still liking the longer term story and we have never had a pullback this large in Chipotle stock (200 day). Fresh capital would likely get interested if the bounce proves short lived.

[DanielJacome]

net net the long term fundamental story is intact. Company missed EPS for the first time in the company's history, but 1c was non-recurring item. Also, mgmt has proven conservative with comps guidance, and this time, the St took the stock down. The only concern is valuation; unit economics are on fire, still, each new store generating 40% ROI.

Valuation now @ 35x 08 numbers, we are looking at 25% EPS growth presumably over next 12-18 months. The opportunistic buyer will wait for the stock to come in bit, but we may not see that. Tons of people made $ on this name, many did not and fresh capital will get interested in the longer term story if the stock breaks 90.

At 700 units (~$150M CAPX projected in 08, all of it can be funded internally), I think the CMG story is in the 4th/5th inning and we are nowhere near saturation -- If these guys can raise prices in a weak economy, think what they could muster when the US is cooking; they'll need the price raises to offset the input (corn/chicken) increases, byproduct of the ethanol boom, which has popped feed prices like a basketball released from underwater.

Bottom line: the concept travels well, the secular push for high quality ingredients is a nice backdrop, and I'm betting on Steve Ells the founder to help CMG survive thru the current stagflation cycle.

[DanielJacome]

Nice call - Briefing.com guys had the call laced nicely as well. Smart $ bought in at after hrs @ 92 and made 11-13% in a day. Shorts made some money on the call, but since it was hard to borrow more shares, they covered. That, combined with fresh capital longs looking for "value" created the bounce you predicted.