Submitted by
Randall Radic
as part of our
contributors program
.
In the last few days, Chipotle has been all over the news,
especially the business channels. Chipotle is a chain of laid-back
Mexican restaurants. They serve stylish laid-back food prepared on
shiny
foodservice
equipment
. The company is run by a group of natural-food evangelists who
believe their product can and will revolutionize the way people
eat. And they might be right, for natural and organic foods are
riding atop a wave of popularity at the present moment. Still, the
question is, are people willing to pay the price premium such foods
command.
Some people don't think so. David Einhorn, who manages a hedge
fund, is one of those people. Einhorn announced a few weeks back
that he was shorting Chipotle's stock. He stated that Chipotle's
primary problem was Taco Bell, whose new 'Cantina Bell' menu was
going to blow Chipotle's good ship lollipop right out of the
water.
Unfortunately, Mr. Einhorn's forecast came true. The company
reported third-quarter 2012 earnings last Friday. Needless to say,
the report left investors gasping for breath. The stock fell more
than 15% on Friday, which means that over the past few months
Chipotle has experienced a 40% decline. In April, the stock was
trading at $442, before dropping to $200. It rebounded to $239 as
of Wednesday.
However, the picture is not quite as gloom and doom as it might
appear. Chipotle reported 18.4% revenue growth this quarter, with
sales jumping 4.8%. And that's not bad, especially in the current
economic climate. However, they do indicate slumping numbers in
each area, when compared to previous quarters.
CFO Jack Hartung has indicated that Chipotle will increase its
prices in 2013, if costs keep going up. The company will be forced
to pass on the higher cost of doing business to the consumer. If
that happens, some analysts believe that Taco Bell, which most
analysts don't think is a real threat currently, could become a
real problem. Most analysts believe that a menu price increase by
Chipotle would leave many of its present consumers with a serious
case of indigestion. A Chipotle burrito runs around eight dollars,
and that's without guacamole. When that price goes to ten dollars,
it may reach its tipping point, which will serve to hinder
Chipotle's momentum.
Even with the sharp drop in stock price and the threat of menu
price increases, the market doesn't seem to agree, because
Chipotle's stock is still priced for growth. Analysts expect around
$10 in earnings per share over the next four quarters. And the
price-to-earnings ratio is still at 24, which is pretty darn high
for a company that just predicted "flat" sales. Admittedly, the P/E
was at 60 at one point, which may have been too high. Nevertheless,
the company is still planning on 160 new locations per year, and up
until recently had produced fantastic profits.
A few analysts are touting McDonald's as a better investment.
But McDonald's also missed their earnings targets, and have a
forward P/E of around 14 or 15. Chipotle, at 24, looks like a
better bet. Sometimes unwarranted pessimism drives a stock down
more than anything. In the case of Chipotle, that may be what's
happening.