David Einhorn may be affecting stocks again, this time when it comes to Chipotle Mexican Grill, Inc. (NYSE: CMG). Einhorn spoke at the Value Investing Congress Conference on October 4th, recommending investors consider shorting Chipotle stock when compared to Taco Bell by Yum Brands, Inc. (NYSE: YUM). Einhorn stated he believed Yum Brands was a sizable threat when compared to Chipotle given its new Taco Bell menu line "Cantina Bell." Yum Brands is marketing its new menu as equal quality as the Chipotle menu… but at significantly lower prices. In addition to stiff competition, Einhorn bet against Chipotle due to the company's rising employee-related expenses and the increasing cost of food like corn and some meats. Many market watchers now believe Einhorn's theory may have been correct, given the recent state of Chipotle stocks when compared to Yum Brands.
From a financial perspective, both Yum Brands and Chipotle are showing strengths, however Yum Brands may be seeing better results overall. Both companies are showing revenue growth over the past year, however while Chipotle's growth is sitting at 15.8%, its revenue is still only US$2.52 billion. This is a far cry from Yum Brands, which has revenue of US$13.59 billion and is still seeing a growth rate, even at 3%. Revenue is also affecting the increasingly large gap between each company's net incomes over the past year. Yum Brands have reached a net income of $US1319 million throughout the past 52 weeks, while Chipotle is sitting at a modest rate of US$214 million by comparison.
Another area that may also be of interest to investors is the PE ratio of each company. Yum Brands PE ratio is considerably lower than Chipotle's at just 20.58. This is more than 40% lower than Chipotle's PE ratio, currently much higher at 34.86.
Chipotle's value began to drop on the stock exchange after Einhorn's comments at the conference, resulting in a clear difference between the performances of each company. Chipotle stock dropped 15% following Einhorn's comments, and on the flip side of the coin, Yum Brands shot up almost 20%. Yum Brands also announced an 18% increase in its quarterly dividend in September this year, seeing its stock continue to rise into October and reach an overall return of +38.76% for the entire past 52 weeks.
Unfortunately, Chipotle has not had quite the same luck this past year. In July, the company announced that it expected to achieve mid-single digit growth in restaurant sales for the 2012 fiscal year, which only saw its value on the stock exchange plummet from $400 to just $280 by the start of August. Chipotle experienced another fall in September and again in October after Einhorn's conference, and has been unable to recover its position. This has left Chipotle in a difficult position, with an overall return of -8.72% for the past year.
Einhorn may not be responsible for the initial downfall in Chipotle's value, however with investors now watching Chipotle stock drop as he predicted, some are certainly heeding Einhorn's words. Overall, Chipotle is still working with a fairly healthy profit margin and a higher revenue growth percentage than Yum Brands, but it can't be denied that the company's stock isn't currently wowing investors. On the other hand, Yum Brands may be seeing a lower percentage of revenue growth. Yet with verbal support from Einhorn and the company's fancy new Taco Bell "Cantina Bell" menu, Yum is proving stiff competition when compared to Chipotle. The true state of Yum Brands' competition with Chipotle may not be entirely evident yet. However, investors are certainly discussing whether the company's current financial state is evidence that Einhorn's theory about Chipotle is correct.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Written by staff writer