, founder of hedge fund Greenlight Capital, has moved markets
with his powerful presentations on stocks he has decided to short
and reaped sizable gains. The companies he targets typically have
to respond to accusations leveled at them and after some time has
passed, it becomes clearer whether Einhorn was right in his
assessment. Perhaps most famous are his short positions in
), The St. Joe Company (
) and Green Mountain (
) (read about his Green Mountain short here). Einhorn's portfolio
is up in the low teens through October in 2012.
Einhorn's Oct. 2 revelation at the Value Investing Congress that
his firm took a short position in Chipotle had a milder effect on
its stock price that his previous short announcements - it fell
4.2 percent to $302.96 that day. Chipotle is the upscale burrito
restaurant that focuses on fresh, sustainably grown, humanely
raised, often organic ingredients. Since its founding in 1993, it
has expanded to 1,350 restaurants and seen its stock soar 593%
since going public in 2006.
Though approximately 750,000 customers swarm Chipotle every day,
Einhorn said he sees trouble ahead for the company, highlights of
� Increased competition from a new higher-quality,
cheaper menu at Yum! Brands' (
) Taco Bell, and other copy-cats
� A constrained ability for Chipotle to raise prices
due to increased competition
� Rising food prices (grains have risen and meat
prices are likely to rise)
� A "nosebleed valuation that does not leave room for
His primary concern, increased competition from fast-food chain
Taco Bell, stemmed from a new menu the company is introducing and
results of a survey Einhorn's team conducted. The new menu,
designed by a contestant on the television show Top Chef,
contains less dubious ingredients than Taco Bell's other fare and
at under $5 is more affordable than Chipotle, where a burrito is
around $8. He said a survey of consumers confirmed that many
Chipotle customers would switch.
Several weeks after Einhorn publicly delivered his short thesis,
on Oct. 18, the company discussed price increases in its third
quarter 10-K. Sales, it announced, increased 18.4% to $700.5
million. The increase was composed of new restaurants and a 4.8%
increase in comparable restaurant sales. Comparable restaurant
sales increases were due to increased traffic, and 1.2% came from
increased menu prices.
Chipotle raised prices in its Pacific region in the first
quarters of 2012 and 2011, and raised prices everywhere else in
the summer of 2011. It does not expect to raise prices further in
The company also addressed the impact of rising food prices in
Our food costs decreased as a percentage of revenue during
the first nine months of 2012 as compared to 2011 as a result of
the impact of menu price increases and relief in avocado prices,
partially offset by inflationary pressures on many of our
ingredients, particularly chicken and beef, as well as the impact
of purchasing more naturally raised meats. We expect that food
cost inflation will persist for the remainder of 2012 and will
continue into 2013 and that our food costs as a percent of
revenue will increase.
Food, beverage and packaging costs were 32.3% of revenue in the
first nine months of 2012, compared to 32.7% of revenue in the
same period of 2011.
Regarding the high valuation "that does not leave room for
deceleration" Einhorn cited, Chipotle has a P/E ratio of 34.01,
P/B ratio of 7.2 and P/S ratio of 3.7, with a market cap of
$$9.22 billion. Its P/E ratio is down from as high as over 60
earlier in the year.
CMG data by GuruFocus.com
In the past five years, the company has grown revenue annually at
the rapid pace of 22.8%, EBITDA at 33.2%, free cash flow at
133.6% and book value at 17.3%. (See Chipotle's 10-year
financials page here.)
Sales indeed appear to be slowing recently. This year, comparable
restaurant sales increased 12.7% in the first quarter, 8% in the
second quarter and 4.8% in the third quarter.
As of the third quarter, the company appears set to meet its
mid-single digit comparable restaurant sales growth target for
2012. In 2013, it is expecting flat to low-single digit
comparable restaurant sales.
The company, however, plans to open more restaurants next year
(165 to 180) than it expects to open in 2012 (155 to 165). In
addition, it is introducing a new Asian-inspired concept,
ShopHouse Southeast Asian Kitchen. It already has two of the
restaurants in Washington, D.C., and in 2013, expects to
introduce the ShopHouse in the Los Angeles area.
"While building Chipotle remains our primary growth strategy,
we've seen great interest in ShopHouse in Washington," said Steve
Ells, founder, chairman and co-CEO at Chipotle.
Einhorn's concerns about the Chipotle's high valuation being
unable to sustain a deceleration in growth were affirmed when its
stock price dropped 15% on announcement of its third quarter
results. The price, however, has already rebounded about 19% to
$290 per share in Friday trading - higher than the price the day
of the release.
See David Einhorn's stock holdings in his portfolio here. Also
check out the Undervalued Stocks, Top Growth Companies and High
Yield stocks of David Einhorn.About GuruFocus: GuruFocus.com
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