CMG: TWO POINTS TO WATCH

CMG is one of a long list of the companies we follow that is priced for perfection.  Others include MCD, SBUX, YUM, DPZ, PNRA and BWLD.  Given the early read in this earnings season, companies that are priced for perfection need to put up an exceptional quarter to keep the momentum going.  We believe CMG will post some of the best numbers in the industry but whether or not it is going to be enough to keep the stock going higher is difficult to say.  

 

Looking out to 2012, we see two important metrics that will help to determine how the rest of the year is going to shape up. 

 

Chipotle is trading near its all-time highs and at 21x EV/EBITDA NTM, making it the most expensive stock in the space.  We’re not making any call into the quarter; this business model has clearly surprised to the upside over the last few years.  Here are two key points we will be watching for any sign of weakness.  It should be noted that two other companies that the Street loves, MCD and SBUX, printed strong numbers last week but traded down because they missed expectations.

 

Is the company taking further price and did pricing impact traffic in 4Q11?  The company suffered in early ’09 from a drop off in traffic after pricing was taken up to protect margins.  While food inflation has subsided, we expect a continuation of margin pressure from those items that CMG relies on.  CMG took significant pricing in 2009 and traffic did fall off precipitously.  One could argue that the brand is stronger now, but we will be watching to see if the divergence between Food Away from Home CPI and CMG pricing grows any larger in 4Q.  If, on the margin, other companys' offerings are perceived to be better value than Chipotle's, we would expect that to negatively impact traffic (second chart).  

 

CMG: TWO POINTS TO WATCH - cmg pod1

 

CMG: TWO POINTS TO WATCH - CMG pod1 CPI 1

 

 

Is the company continuing to drive strong returns on incremental investment as it grows?  This is a key metric we follow for restaurant companies that are growing.  If the ROIIC were, any time soon, to come down from the best-in-class level it is currently at, we would expect the stock to trade at a much lower multiple.  While we could see a dip in the stock price if the street’s expectations - particularly the anticipated 10.4% comp - are not met, we do not expect any larger correction until the ROIIC comes down much, much further.  

 

CMG: TWO POINTS TO WATCH - CMG ROIIC

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more