Taking Chipotle Chips Off The Table

Summary

• In March 2016 I wrote a long article on Chipotle. Since then, total return (capital gain) has been almost 65%.
• In 2015 Chipotle faced a major blow with the E-coli outbreak. Thereafter additional headwinds emerged (e.g. norovirus incident). I felt there were many generalizations/binary views and panic selling was overdone.
• I therefore initiated a long position in 2016 at an average price of ~$500 and doubled down around $350 given my high conviction.
• I recently sold the majority of my position at ~825, but still maintaining a sizeable long position.

Chipotle Mexican Grill (NYSE:CMG) faced major problems as a result of the E-coli outbreak in 2015, which led to store closures, investor panic and a plummeting share price. Thereafter, investors went through a roller coaster ride, with additional health scares (norovirus incident), Ackman's Pershing Square taking a position, founder Steve Ells being replaced as CEO, etc. CMG's share price was around $750 in late 2015, fell to around $250 in early 2018 (a whopping ~2/3 drop) before staging a major comeback (share price currently $836.32 - more than three fold increase).

I wrote a long article about CMG in March 2016 entitled Chipotle Investors Should Focus On Fundamentals, Not One-Offs. Since the publication (CMG price at publication was $508.87 as illustrated in the graph below) the share price has increased by almost 65%.

My returns are even larger as I doubled down at around $350. I recently sold most of my position at ~$825/share. Whilst I still see considerable value in CMG over the long run, I believe this is a prudent move given that my position become a bit oversized due to the capital gain. The reasons why I liked CMG back in 2016 still apply today.

Buybacks have resulted in a ~10% reduction in share count since 2015

Back in 2016 I had written:

buybacks at today's low prices will have a big positive impact on future EPS.

CMG continues to repurchase shares today, albeit at a slower pace, especially compared to 2016. I am glad that CMG followed through with aggressive buybacks, especially during the 'dark era' between 2015 and 2017. For example, in 2016 alone CMG spent almost $850M on share repurchases.

It is also important to note that until 2015 the share count was actually flattish. However, since 2015 the diluted share count has fallen by ~10% (31.5M shares

Analyst’s Disclosure: I am/we are long CMG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I have trimmed my position substantially, taking gains, but retaining a decent long position.