David Einhorn's Feast or Famine Chipotle Short

Updated from 12:47 p.m. ET to afternoon market action and additional data throughout.

NEW YORK ( TheStreet) -- Shares of Chipotle Mexican Grill ( CMG) have quietly regained the ground lost since David Einhorn of Greenlight Capital detailed a bet against the company, and upcoming earnings will provide insight into how the Denver-based restaurant chain's stock will perform in 2013.

Chipotle faces a high bar on year-over-year earnings and same-store comparisons and pressure on margins from commodity price inflation, but if the company can prove to investors that it still has high growth prospects, the short trades could eventually unravel.

The company's shares are up over 15% this year, outperforming the S&P 500 Index. Chipotle recently breached a $319.87 share price prior to Einhorn's presentation, indicating the stock may have already bottomed amid already apparent earnings headwinds and negative publicity.

Still, with the stock trading at forward multiples of about 30 times earnings and a short interest of roughly 13%, Chipotle investors remain vulnerable to disappointments such as the company's third quarter earnings, which sent the company tumbling to multi-year lows in October.

After posting 50%-plus stock gains in 2009, 2010 and 2011, Chipotle's shares fell nearly 20% in 2012, as some like David Einhorn bet the company's best days of growth, earnings and brand were behind it.

Einhorn believes Chipotle is a run-on-the-mill fast food chain in the eyes of consumers, meaning margins and growth at the company will fall amid competition from price competitors such as Taco Bell, owned by Yum! Brands ( YUM) and Qdoba Mexican Grill.

"In presenting our short thesis on Chipotle, we noted that the stock trades at a premium multiple but faces significant headwinds including rising food costs, higher healthcare costs related to Obamacare, and competition from a resurgent Taco Bell," Einhorn wrote in a 2012 investor letter, which cited a Greenlight Capital survey indicating Taco Bell's Cantina menu could draw Chipotle customers.

Chipotle, on the other hand, continues to point to consistent earnings growth and rising store profitability as clear evidence the company has a premium product.

For instance, Einhorn has so far failed to mention that Chipotle posted record operating and EBITDA margins in 2012, according to data compiled by Bloomberg, as the company saw the benefit of an over 23% return on invested capital, another new record.

It's also hard to bet against a company that sees a 71.5% return from the $800,000 it costs to open a new restaurant, according to a recent investor presentation from Chipotle.

Chipotle shares gained over 3% in Wednesday trading to $343.55, cutting at the company's slight underperformance to the S&P 500 since Einhorn's Oct. 2 presentation.

The mathematics behind Chipotle's store and earnings expansion since 2009 indicate the company may have much further to run in growing sales and earnings without diluting profit margins.

Since 2009, Chipotle has grown its store count from just under 1,000 restaurants to 1,400 at the end of 2012, however, the company has seen an 80% rise in revenue and an over 100% increase in net income over that period.

The company opened 183 new restaurants in 2012 and it expects up to 180 store openings in 2013. Forecasts from Chipotle are for flat to single-digit same store sales growth in 2013.

Chipotle's first quarter earnings report, scheduled for April 18, will likely foretell whether Einhorn can continue to press the company's underperformance or if he will need to re-evaluate the logic of his bet.

Analysts forecast Chipotle will only grow EPS about 7% this quarter, indicating a sharp drop in profit growth, as revenue continues to hit new highs.

First-quarter consensus estimates stand at revenue of $724 million and a profit of $67 million, or $2.13 a share, according to Bloomberg data.

The quarter will also be about how 2013 guidance impacts investor concerns such as same store sales comparables, and commodity price inflation.

Chipotle has yet to fully detail how it may use a marketplace premium to raise prices and offset some earnings drains like high food costs, which represent about 30% of the company's expense.

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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