This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Chipotle Is Almost Out of the Woods

Stocks in this article: CMG SBUX YUM

NEW YORK ( TheStreet) -- Chipotle Mexican Grill (CMG) has recovered strongly from an October share price free-fall as it became hedge fund Greenlight Capital's newest short position and, soon thereafter, significantly missed third-quarter earnings on slowing growth trends.

Since David Einhorn, head of Greenlight Capital, detailed why he was shorting Chipotle shares on October 2, the stock has risen about 15%, nearly double 8% gains made by the S&P 500 Index. Meanwhile, Chipotle shares are up over 55% since lows hit in late October, amid recovering earnings and maintenance of the company's earnings and growth guidance for 2013.

As Chipotle climbs back near all-time highs hit at this time last year, however, the company isn't entirely in the clear on investor concerns that weighed on shares in the final quarter of 2012.

The company's earnings-per-share growth is forecast to slow to single digits in the second quarter of 2013, according to consensus analyst estimates polled by Bloomberg. Chipotle's first-quarter earnings beat, meanwhile, showed quarterly revenue growth at the company slowed to just over 13%, the lowest figure since late 2009.

As profit and sales growth trails off on both a backward- and forward-looking basis, Chipotle's price-to-earnings ratio is on the rise. At Monday share prices of $369.67, Chipotle's 12-month trailing P/E stands at about 40 times earnings.

Jeffrey Gundlach of Doubline Capital recently indicated he will present a short trade in Chipotle shares at the upcoming Ira Sohn Conference. Einhorn will also be presenting at the conference, but the hedgie hasn't said what he will be speaking about.

" We think the stock is still overvalued relative to what we believe will be near-term below trendline growth," Andy Barish, a Jefferies analyst, wrote in reaction to Chipotle's better-than-expected first quarter earnings. Barish rates shares 'underperform' with a $265 price target.

Chipotle shares remain 16% below record highs of $440 a share hit last April.

Still, it may only take another quarter or two for Chipotle to dispel concerns raised in recent earnings and those pitched by vocal investors who are betting against the company's shares.

Chipotle's first-quarter earnings generally showed a stabilization in growth trends, with comparable store sales rising 1%, as cost controls and better-than-expected revenue helped to drive a significant beat.

Revenue rose 13% to $726.8 million, helping to drive profits of $2.45 a share for the quarter, beating consensus forecasts of $2.13 in EPS, according to Bloomberg data.

While food costs in the quarter rose significantly and represented about 33% of revenue, Chipotle indicated rising commodity price-based expense has run its course. Unseasonably cold weather in many parts of the U.S., the so-called "fiscal cliff" and tax increases, meanwhile, didn't dampen consumer demand for Chipotle burritos.

Chipotle's first-quarter earnings signal the company has recaptured its story to the investor community, after a half-year of uncertainty.

For instance, instead of first-quarter earnings being colored by uncertainty surrounding food expense, margins and comparable store sales growth forecasts, the most notable recent announcement by the company may have been its introduction of Patron Tequila to margarita's made in the company's stores.

Such moves highlight how Chipotle may have easy levers to pull to drive in increasing revenue from its consistently growing number of stores.

While margaritas account for only about 1% of Chipotle's revenue, the company told BusinessWeek it expects a higher figure going forward given the appeal of Patron.

Better tasting tequilas may build excitement about Chipotle for the company's loyal customers, and it may underscore to investors that the Denver-based restaurant chain is a premium brand in some key demographics.

When outlining a short position in Chipotle shares, David Einhorn said a survey conducted by Greenlight Capital showed the company's customers were vulnerable to switching to Taco Bell, owned by Yum! Brands (YUM).

A recent brand score survey by Goldman Sachs supported some of Einhorn's assertions.

1 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,778.15 +421.28 2.43%
S&P 500 2,061.23 +48.34 2.40%
NASDAQ 4,748.3960 +104.0840 2.24%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs