Chipotle: Above the fray

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Julian Close 04/28/2014

A lot of investors have done very well by buying and holding stock in Chipotle Mexican Grill ( CMG ). One of those, a very early investor, was McDonald's ( MCD ), and McDonald's cleaned up thanks to Chipotle's exceptional 2006 IPO. CMG stock rose over 100% on its first day of trading, making it more successful than any IPO on Wall Street in the previous six years. When McDonald's divested later that year, it made $1.5 billion, having invested only $360 million.

But was it worth it? By investing in Chipotle, McDonalds helped to create the fast casual dining industry that is today digging into its sales numbers. Chief among the fast casual players, of course, is Chipotle itself, which, quite unlike McDonald's, remains one of the fastest growing chains in the country. Chipotle opened 185 new restaurants in 2013, and is on track to open approximately the same number in 2014. Chipotle's revenue climbed 18% in 2013 and it is expected to rise 16% in 2014.

Chipotle's profit margin has fallen somewhat this year, but few doubt that the chain could raise prices without losing much sales volume, considering how much business stores are currently doing. Certainly at peak hours, and even at other times, price becomes an irrelevant concern in many stores, where the only thing that limits sales is the speed with which cashiers, order takers and food preparers can move people along; the restaurant's throughput, in other words.

That throughput is impressive. There are times when, at peak hours, the majority of the floor space in a Chipotle restaurant is taken up not by diners, but by those standing in line to be fed. At these times it is not at all uncommon, according to the chain, for them to complete 350 transactions in an hour. (Personal note: that figure actually sounds a bit low to me. I would swear to having seen a line of 100 customers disappear, or at least fully rotate, in ten minutes. Swing by the Charlottesville, VA location if you wish to behold some food prep prodigies at work.)

The simple reason for Chipotle's success? Good food-which is to say tasty food. And while it is entirely possible (or extremely easy, for some of us) to overeat at Chipotle's, the chain serves a wide variety of vegetable choices, and the food has a general wholesomeness that one never gets in a fast food restaurant. It healthiness or lack thereof, in other words, is exactly what you choose to make it. Signs of Chipotle's success aren't hard to find, but most recently, the company announced that its first quarter 2014 sales were up 24% from the year-ago quarter. That was during a quarter in which many chains (including one-time sugar daddy McDonald's) reported falling sales and blamed it on bad weather.

Given the recent retrenchment in the share price of CMG stock, along with Chipotle's unchecked growth-rate, its immunity from trends affecting other restaurant chains, its reasonable profit margins, and, most importantly, its extreme pricing flexibility, the chance of any significant near-term drop in the price of CMG stock appears remote.


Chart courtesy of stockcharts.com

I seek to capitalize on this strength with a bull-put credit spread. Look at the September 435/445 bull-put spread for at least a $2.00 credit. You will need to use limit orders to place this trade. This trade has a target return of 25% over 145 days, which is an annualized return of 62.9%, (for comparison purposes only). CMG stock has to fall 12.8% to cause a problem. Be aware that this is an aggressive trade, best undertaken by investors with diverse portfolios and high tolerance for risk.




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: CMG , MCD

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