By
Akram's Razor
:
In April, I published a article titled, "
The Birken Burrito
," in which I recommended shorting Chipotle Mexican Grill (
CMG
). For those that read the piece, the main focus of my short thesis
was Chipotle's then seemingly unfathomable premium valuation to
other popular food franchises and comparable premium brands.
To put things in perspective, I compared Chipotle's then 31x
EV/EBITDA multiple to the 32x multiple of Hermes (HESAF.PK) because
that's precisely where you needed to go to find a retailer trading
on par with Chipotle's valuation. Well, a few months and 40% later,
Chipotle has come back to earth and is now even an Einhorn short.
Now, while I can see where Einhorn is going with this trade, I
personally would not short Chipotle here. (I'd actually now rather
be long it over almost any other name in the space)
Simply put, it is no longer a great company with a relatively
unattractively priced stock. At its current share price, Chipotle
trades at a forward eps multiple of 26x that is on par with Buffalo
Wild Wings' (
BWLD
) 23x and Panera's (
PNRA
) 24x. It is also now trading at an EV/EBITDA multiple that is
roughly equal to Starbucks (
SBUX
). So, why short Chipotle at a comparable earnings multiple to its
peers when its operating margins are far superior? (17% versus 9%
and 12.5% for BWLD and PNRA, respectively)
Taco Bell's Cantina Bell Menu launch was a nice added boost for
my short thesis into Q2 earnings especially considering Chipotle's
management had already been cautioning about H2 tougher comps on
their Q1 call, but it is not a long-term or even intermediate term
competitive concern. This is because Chipotle's brand identity is
distinctively different, and they have invested so heavily in
building that brand that I can't see Taco Bell taking any
meaningful share. Thus, risk/reward here makes little sense if you
view Chipotle within the context of its broader peer group. But the
market being what it is there is always a stock that looks the way
Chipotle did a few months ago, and in my humble opinion that stock
is now Whole Foods (
WFM
).
Here is another great company that has been growing earnings at
a very healthy clip and has a religiously loyal customer base.
Simply put, Whole Foods is to groceries what Chipotle is to casual
dining. It sells a premium product, and has an even more premium
priced stock. At its current share price, Whole Foods trades at 42x
trailing earnings, 34x forward earnings, and at about 18x
EV/EBITDA. Comparing it to traditional grocers is an exercise in
futility because those names trade at low single digit earnings and
EV/EBITDA multiples [Safeway (SWY) for example trades at 4.5x
trailing EV/EBITDA and 7.5x forward earnings]. Those looking for
comparable names somewhere in Whole Foods' market cap league need
to go outside of the traditional grocery space, and when you do
that Chipotle and Starbucks make the most sense. Take a look
...
|
|
Operating Margins
|
EV/EBITDA
|
Forward P/E
|
|
Chipotle Mexican Grill
|
17%
|
16x
|
26x
|
|
Starbucks
|
13%
|
15x
|
22x
|
|
Whole Foods
|
6%
|
18x
|
34x
|
As you can see, Whole Foods is the most expensive name in this
group despite its much weaker operating margins. This is
interesting because when most people defend Whole Foods valuation,
they always cite their impressive sales per square foot and
freakish industry leading profit margins as reasons the stock can't
be compared to other grocers. But if you stick Whole Foods in with
the industry benchmarks in 'branded' food retail, the stock still
looks expensive because at the end of the day it is still a grocer.
Now you can criticize this exercise and say there is no way Whole
Foods can be able to stack up on an operating margin basis with the
likes of Chipotle and Starbucks, and I won't disagree with you. But
if you are going to go that route, don't defend Whole Foods
valuation by saying it is not a 'traditional' grocer as the brand
has evolved into something more like a restaurant experience, and
thus deserves a multiple that reflects that.
So, instead of shorting Chipotle, I think Mr. Einhorn should
take a closer look at Whole Foods here. Yes, Supervalu (SVU) and
Safeway are not going to come up with a new Cantina Bell like menu
reason to short their competitor, but at these valuations, you
don't need that. Whole Foods - the stock's worst enemy going
forward is itself, much like Apple (AAPL) over the past few weeks;
it is highly susceptible to running into the ever increasing
expectations wall. However, unlike Apple shares, Whole Foods
investors don't have the luxury of a "the stock is cheap" argument.
Short or buy some out of the money puts until the name corrects
20-25% or go buy some Starbucks or Chipotle shares as they are a
lot cheaper and still sporting robust business models.
Disclosure:
I am short [[WFM]]. I wrote this article myself, and it expresses
my own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
this article.
See also
Mortgage-Backed Securities Offer A Raw Deal
on seekingalpha.com