Chipotle Mexican Grill $CMG is screwed that is the bottom line and this will be my best short idea in the last couple years. Next week I will detail a short I put on at $9 and covered for $0.01. I never thought that would go to a penny but it did. Many think Chipotle will never drop to $400 or $300 or $200. But it will. This is a short Ax would go after.
In one of our newsletters, I wrote up Chipolte as a short idea on December 30 rode it down into the January low and did not cover. Felt some pain into the rally into early March. Now I am confident this is the beginning of the end for the stock. Why? I will detail below but first some background on why I like this as a short.
Chipotle has some 1,900 restaurants in the United States that serve its customer Mexican food that is considered to be different from Taco Bell or Qdoba in that the ingredients are locally sourced and sustainable.
The stock closed at $489.94 when I wrote it up and our upper target was $772.85 and the price target was $576.35 which is well above the current price. The lower bound was $442.77. Beta is 0.27 so this is an ideal name to add as markets rebound from the recent lows and we sunset 2015 concerns. High beta shorts could be very risky IF the market rallies further.
In December, we noted that estimates for the current year (December 2015) are $15.51 and $16.39 for next year (December 2016). We think over time 2016 numbers are way too high and will move lower based on recent problems Chipotle has run into with eColi. The numbers for 2016 show growth of $0.88 or 5.67%. The P/E for next year is 29.89. It usually works to short a stock with a growth rate of 5.67% and a P/E of 29.89. If the P/E fell to the growth rate, then the stock is worth $92.93. There is no dividend on this name and there never will be.
In December there were 6 strong buys, 10 buys, 16 holds and 1 underperform with no sells. So the potential exists for a HUGE number of downgrades to underpeform or sell. Since late November, there have been 10 firms to either change or reaffirm their ratings. Of these, there is only 1 buy. Goldman downgraded today.
Technically, $472.41, the April 28th, 2014 low, seems to be a good level of support. If that level is broken, then we are looking at $434.29 and then $233.82. As we write, the stock is at $465.98.
In December, Bloomberg Business Week featured the company on their cover. As we read the article, we realized this is a no brainer short idea. Why? Below we list the issues from the article and we would suggest you go read the article at http://www.bloomberg.com/features/2015-chipotle-food-safety-crisis.
1.The company is not trying to be cost effective as it battles the eColi battle. CFO Jack Hartung notes that they will be “very inefficient” in trying to control costs. That is lovely and the last thing you want to hear if long the stock.
2.The company has focused on focus integrity and now they may have to focus on food safety which will cost them more money. Again crushes margins.
3.Chipotle has pulled all estimates for 2016. Sellside firms like Goldman are throwing in the towel.
4.The company still plans to add some 220 to 235 new restaurants in 2016. NFW. They will cut this number.
5.Comparable same store sales are fallling from 16.8% in 2014 to 5.5% in 2015 and this will drop even more in 2016, maybe into the negative. Since we wrote in December, they have been putting up crappy numbers month after month.
6.Chipotle is seeing sporadic customers coming to stores less as well as frequent customers. not good.
When you compare Chipotle to Qboda you realize who Chipotle is being priced for perfection. Qdoba is part of Jack In The Box (JACK) which has 2200 Jack in The Box stores and 600 Qdoba. There are 2800 units under Jack of which 600 are Qdoba or roughly 21%. The total market cap of Jack is $2.77 billion. So we can multiply this by 21% to get a market cap for Qdoba of $581 million. 600 stores equals a per store market cap of $968,000 per store.
If you applied the same metric to Chipotle, it would have a market of $1.84 billion. Instead it has a market cap on a per store basis of $7,984,210. Unheard of.
Now they are getting into burgers. WTF. Tom Peters the author of In Search of Excellence notes that when a company fails to stick to its knitting it is time to run not walk away from the stock. The burger market is SOOOO OVERCROWDED with many new startups killing.
Mad Money Guru Jim Cramer who I really like and respect is making a huge mistake sticking with this name. His ego is getting in the way and he needs to realize that circumstances have changed and the company will never be its former self again. The move to burgers is the icing on the cake for this short.
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This may be a damaged company and overpriced stock, but the bar is set pretty low for 1Q2016 earnings: -0.82/ share.
In addition, it has had 4 downgrades in ~2 weeks and is already well-off the high. I’ll see how earnings (Apr 26) turn out, as well as the reaction to the news.
We’re getting it for lunch at work today. The death of Chipotle is greatly exaggerated.
You will lose just like Bluestar did shorting Amazon. Good luck with the short.
This is a terrible idea and article. Before you compare “a per store market cap of $968,000 per store.” for Qdoba vs Chipotle you should compare the average sales per unit. The average Chipotle does 2-2.5 times the sales of a Qdoba. Do you know how difficult it is to make large margins at 900-1mm per store vs 2+mm per store.