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David Einhorn's Feast or Famine Chipotle Short

The general bias of analysts going into the quarter appears negative, given consensus 2013 EPS forecasts that have fallen from over $11 a share to $10.25. If current analyst forecasts to hold true, Chipotle's annual EPS growth of 17% would be the lowest since the financial crisis.

In the first quarter, Chipotle could surprise modestly to the downside, according to a recent report from Jefferies analyst Andy Barish, who rates the stock "underperform" with a $250 price target.

Across the restaurants sector, investors generally have ignored a slowdown in customer traffic in 2013, according to Barish, who highlighted Chipotle as the company most at risk from an industry lull. In contrast, Barish sees other high growth, high valuation chains like Starbucks (SBUX), Dunkin' Brands (DNKN) and Panera Bread (PNRA) as weathering a slow-growth environment.

It gets worse, according to the logic of Einhorn's trade against Chipotle shares, given the expectations of pricing pressure and market share erosion he outlined in October.

Not all of Einhorn's short trades have performed well recently, however, as bets against the likes of Moody's (MCO), Green Mountain Coffee Roasters (GMCR) and Martin Marietta (MLM) continue to suffer from rising share prices.

In fact Einhorn lost money shorting stocks in the fourth quarter of 2012, as companies Greenlight bet against rose an average of 10%, sharply outperforming a quarterly drop in the S&P 500. Greenlight Capital returned 7.9% for 2012 and fell 4.9% in the fourth quarter on short portfolio losses, underperforming the S&P.

Einhorn continues to press a skeptical view of Green Mountain's accounting practices. The hedge funder said in October remarks at the Value Investor Congress that he believes ratings agency Moody's will lose investor lawsuits alleging fraud tied to pre-crisis bond ratings. He also recently disclosed a short trade against McGraw-Hill (MHP), owner of Standard & Poor's, amid a Department of Justice fraud lawsuit.

Expectations of slowing profits and declining margins at Chipotle, by contrast, appear relatively benign and they even mirror earnings trends at Einhorn's second largest long position, an over $500 million investment in Apple (AAPL) shares.

When outlining Greenlight's survey on Chipotle's brand and the fund's short trade, Einhorn told his audience to seek their own analysis.

An April 4 survey from Goldman Sachs analyst Michael Kelter confirms some of the suggestions made by Einhorn in his presentations about Chipotle.

"We believe Chipotle's 'cool factor' may be wearing off as our survey suggests lower conversion scores among younger age cohorts," wrote Kelter. Goldman Sachs' brand equity analysis put Chipotle far below Starbucks, Panera Bread and Subway, while a 63.8 index score was only marginally higher than down-market restaurants like McDonalds (MCD) and Taco Bell.

Still, Chipotle's earnings figures and financial performance may undercut intangible analysis such as brand equity and surveys on customer switching.

In 2012, Chipotle reported a record 27% profit margin from its existing store base, indicating a continued premium on the company's Mexican food and rising earnings from recently opened stores.

Meanwhile as Chipotle expanded its store count by nearly 50% since 2009, operating margins have grown from about 13% to 17%, according to a March investor presentation from chief financial officer Jack Hartung.

Piper Jaffray analyst Nicole Miller Regan has highlighted the company's entrepreneurial management of employees and new growth initiatives, including international expansion and catering, as reasons Chipotle can continue to outperform.

"[We] remain confident in the company's global growth profile and industry-leading approach to both managing and growing its human capital," wrote Regan in March 27 report that increased forecasts of comparable store growth and 2013 EPS estimates.

Ultimately, earnings and guidance will provide insight as to whether Chipotle's growth slowdown is bottoming or whether it is accelerating.

Bottom Line: Going into the first quarter, estimates for Chipotle's earnings have fallen. Either ordinary investors or David Einhorn aren't paying attention.

Greenlight Capital through a spokesperson at Sard Verbinnen declined to comment on whether the fund has changed its trade against Chipotle since Einhorn's Oct. 2 presentation.

-- Written by Antoine Gara in New York

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