Chipotle Mexican Grill: Sometimes I Can't Win for Losing

I've been negative on restaurant stocks since the beginning of the blog for reasons that are very apparent now, but not back then in the "economy is fine, and inflation is a ridiculous concept" era. [Sept 19 - Tough Times Ahead for Restaurants?]

Middle class consumer squeezed along with skyrocketing inputs for their food doesn't bode well for profit margins in this group as a whole. We have the cheese inflation, the dairy inflation, the corn inflation and now the wheat inflation.

One name I highlighted was Chipotle Mexican Grill (CMG):

Add to the fact it's now trading at nearly 60x 2007 earnings and it's hard for me to get excited at these valuations, but for the next 5 years it's one to watch.

Then in its own entry later [Oct 30 - Chipotle Mexican Grill (CMG) - The One Impervious Restaurant Stock]

Chipotle is apparently the teflon stock in the sector, with a super (considering the headwinds) report. That said, at >60x 2007 estimates it's priced as a teflon stock. And they didn't say much about the cost of inputs like cheese, but they are the growth stage of expansion where apparently they can laugh mockingly at the increases.

Just too pricey for me especially in this economy and the economy over the next 18-24 months. 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. Or just a slowing economy... as people make McDonald's their sit down 'restaurant' of choice as we all get slowly poorer with our more useless pesos, er, dollars.

Unfortunately there is no Ultrashort Restaurant ETF or I'd be be a happy camper. I made a lot of good calls in consumer discretionary in the late summer/early fall 2007, but with the ability to short individual names they are just calls, and not helping our performance. Even the bulletproof stocks like this one are getting their woodshed moments - the stock is down 17% today off of earnings, and now over 50% from last summer's peak. Much like Whole Foods Market (WFMI) - when a "best of breed" stock trades at multiples nowhere near any of its peers, it's usually a good candidate for the hit list.

This is actually a best of breed company with a very good management, but it does not live in a vacuum. Most of the "junk" rallying of late, outside financials, are the stocks that have an association with the US consumer and have been beaten with an ugly stick repeatedly since last summer despite the pundits' assurance the economy is fine. It is not fine. It will continue to be not fine. Especially with mortgage rates now heading to near 7% - everything is based off housing in our service-based, credit-laden economy. As I wrote earlier today, these lists of stocks rallying the most the past week and a half are going to be great shorts. Again. [Stuff I've Been Negative on Since Last Fall]

• Chipotle Mexican Grill Inc (CMG) on Wednesday said new restaurants fueled a nearly 23 percent gain in quarterly profit, but the result missed Wall Street targets.
• The Mexican-themed, fast-food chain known for serving naturally raised meat said second-quarter net income rose to $24.5 million, or 74 cents per share, from $20.0 million, or 60 cents per share, a year earlier. Analysts, on average, had been looking for earnings of 75 cents per share, according to Reuters Estimates. (1 cent miss = 17% drop in price = brutal)
• Revenue grew to $340.8 million from $274.3 million, but missed analysts' consensus estimate of $343.9 million. (4 million revenue miss = 17% drop in price = did I mention brutal?)
• Chipotle attributed the sales increase to the addition of 49 new restaurants and a 7.1 percent increase in comparable restaurant sales in the second quarter, when customer visits also increased.
• Restaurant level operating margins slipped to 22.4 percent from 23.2 percent the year earlier, primarily due to an increase in food costs and higher advertising costs. Those higher costs were partially offset by menu price increases and lower promotion costs.
• The company repeated its outlook for long-term earnings per share growth of 25 percent, reiterated its 2008 forecast for comparable-store sales increases in the mid-single digit range and said it still plans to add 130 to 140 new restaurants this year.

Even at $70, this still trades at over 25x forward earnings. It is too bad it is not tied to the Brazilian or Russian consumer instead of the United States of Subprime consumer. There is a nice base built in upper $50s to mid $60s from spring 2007 - perhaps a good buy there. One of the few nice houses in a very blighted neighborhood.

In this market environment where the market is trending down, it would be a lot easier to drive performance with the ability to short individual names. A few darts thrown in the general direction of a few Vegas casinos, restaurants, retailers, boat, auto, RV, hotel - would of really helped us this past year. Ultrashort ETFs are better than nothing - but very blunt instruments with imperfect precision.

Disclosure: No position

Comments

[Dan Jacome:]

we question that 25% EPS growth mgmt is targeting, too

2008 Jul 25 04:01 AM

[Osaka Newton:]

what are you trying to tell in your article ?
hello ?

2008 Jul 25 08:08 PM

[borisb:]

The B shares have fallen to about $60 and if the growth story still works somewhat, i have to be more bullish then bearish at $60.

2008 Jul 26 11:00 AM