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CMG: Dip Presents Buying Opportunity

CMG continues to be on our Investment Ideas list as a long.

 

CMG: Dip Presents Buying Opportunity - 1

 

Brief Analysis: 3Q14 marked another impressive quarter for Chipotle, which managed to grow same-store sales by nearly 20% at a time when the majority of quick service and fast casual restaurants would be pleased to deliver a low-single digit comp.  The company continues to thrive amid what appears to be a secular shift in the way people, and particularly Millennials, eat out.

 

The stock traded down after hours, however, as low to mid-single digit comp guidance for 2015 came in well below the street's 7.2% estimate.  We believe this was a concerted effort by management to temper aggressive expectations.  This guidance may very well prove to be conservative, but CMG will be lapping the strongest period of comp growth since being spun out as a public chain in 2006.

 

Underlying food inflation was up +8% in the quarter, which is quite possibly the only red flag we could find in the quarter.  The fact of the matter is, this is an incredibly strong company, with strong management, best-in-class unit economics, a robust balance sheet and unparalleled momentum.  We believe any sell-off today would be a nice buying opportunity.

 

Comps: CMG delivered 19.8% comp growth in the quarter, beating estimates of 17.2%, led by traffic growth and, to a lesser extent, an +8.5% increase in average check.  Management guided to low to mid-single digit comp growth in FY15.  Revenues of $1,084 billion (+31.1% y/y) beat consensus estimates by 2.34%.

 

Margins: Despite an accelerating top line trend and a price hike, cost of sales squeezed profits in the quarter, coming in at 34.31% of sales (+75 bps y/y) vs. expectations of 33.58%, as beef, avocado and dairy inflation persists.  Fortunately, Chipotle benefitted from sales leverage throughout the rest of its P&L as labor costs, other restaurant expenses, and general & administrative costs all came in well below expectations.  Operating margins came in at 19.13% (+255 bps y/y), beating estimates by 55 bps.

 

CMG: Dip Presents Buying Opportunity - 2

 

Earnings: Adjusted EPS of $4.15 (+56% y/y) beat expectations of $3.83 by 8.26%.

 

What We Liked:

  • Revenues of $1,084 billion (+31.1% y/y) beat estimates by 2.34%
  • +19.8% same-store sales growth; +13.0% two-year average
  • Restaurant level margin expanded 201 bps y/y
  • Operating margin expanded 255 bps y/y
  • Adjusted EPS of $4.15 (+56% y/y) beat estimates by 8.26%
  • Throughput continues to improve; this quarter by 6 transactions at peak hour lunch and 6 transactions at peak hour dinner
  • AUVs for restaurants in the comparable base reached an all-time high of $2.4 million
  • Strong transaction growth with minimal price resistance and trade-downs
  • Only repurchased $13 million of stock in the quarter; $127 million remaining on current share buyback program
  • Comps momentum in September has continued into October
  • Brand and food continues to resonate with consumers; particularly with Millennials who are increasingly rejecting traditional fast food

 

What We Didn't Like:

  • Management guided to low to mid-single digit comp growth in FY15 vs. current consensus estimates of +7.2%
  • Cost of sales ratio (34.31%) came in 73 bps above estimates and continues to march higher; beef remains an issue, while avocado could moderate, and dairy has likely peaked
  • ACA costs will hit the P&L next year; impact unknown, but costs unlikely to exceed 1% of sales
  • Catering took a step back from a favorable, in-season 2Q; only 1% of sales in 3Q

 

CMG: Dip Presents Buying Opportunity - 3

 

Call or email with questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


BABA: Leaning Short, But...

Takeaway: We put together a 40-page deck outlining our bearish long-term view on BABA.  But we don't have a near-term catalyst, so we're staying on the sidelines for now.  High level themes below.  More detail to follow.

 

KEY THEMES

  1. TOO LARGE TO CONTROL ITS OWN DESTINY:  BABA is essentially China’s E-commerce market, with over 80% of all E-commerce GMV, and over 75% of traffic flowing through its sites.  Without room for share gains, which historically have been tenuous, BABA will become increasingly dependent on the China Growth Story to drive its business moving forward.
  2. CHINA CAN’T GROWTH FAST ENOUGH: While BABA cites this as an opportunity, there is a reason why China lags many major economies in terms of both e-commerce and internet penetration: the Chinese consumer is relatively weaker in terms of both incomes and discretionary spend.  There is naturally room for new user growth, but it will come with a declining yield since these users have less to spend, which means the average GMV (Gross Merchandise Value) of the BABA consumer is facing decline.
  3. GROWTH WILL COME AT A PRICE: Roughly 60% of BABA’s revenues come from vendors marketing to BABA consumers; over 75% of which from P4P (Pay for Performance) ads that require user engagement (clicks) to generate revenue for BABA.  If the average GMV/Active Buyer is facing decline, then the average buyer (and their ad clicks) are worth less to BABA’s vendors. We’re expecting pricing pressure across its Marketing segment, which we’re already seeing signs of today due to the rise of mobile (low-cost vehicle to internet access in China).  Further, if the mix of mobile users continues to grow, then it may also mean less ad inventory since BABA currently isn’t offering a comparable number of ads (vs. desktop). 
  4. NEAR VS. LONG-TERM OUTLOOK: Feasible vs. Lofty Consensus Estimates (40% and 35% revenue growth in F2015 and F2016, respectively).   A strong 1Q15 (up 46% y/y) makes F2015 estimates within reason, but we’re not expecting much upside.   F2016 is a different story; the question is whether growth in Commission Revenue (~25% of total) can compensate for our expectations for a marked slowdown in growth in Marketing Revenues (~60% of total).  Commissions have a very strong tailwind from GMV (transactions) mix shift of to branded products on Tmall (where BABA collects commissions), while Marketing revenue is facing headwinds across a number of fronts (see #2 & 3 above).   We’re expecting F2015 and F2016 revenues of ¥73.0B and ¥94.5B vs. consensus of ¥73.7B and ¥99.6B, respectively.
  5. WHY WE’RE ON THE SIDELINES: First, we don’t have a catalyst in sight near-term (we don’t even have an event yet).  Second, our view here is longer-term, and we’re not as bearish on F2015 as we are F2016 and thereafter.  The stock currently trades at ~20x forward revenue, which means this is a sentiment story.  That makes the stock highly sensitive to immaterial news flow outside a fundamental catalyst, which once again we don’t have near-term, making BABA a dangerous short near term.

BABA: Leaning Short, But... - BABA   vs. China GMV 2

BABA: Leaning Short, But... - BABA   Urban Per Cap3

BABA: Leaning Short, But... - BABA   Internet Income Distribution 2

BABA: Leaning Short, But... - BABA   GMV buyers 2

BABA: Leaning Short, But... - BABA   P4P ads

 

 

Let us know if you have any questions, or would like to discuss in more detail.  

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


Cartoon of the Day: No Russell Muscle

Cartoon of the Day: No Russell Muscle - Russell 2000 cartoon 10.20.2014

 

Don’t forget that even though the Russell was up for the first week in seven last week, over 60% of stocks in the Russell 2000 are currently crashing (-20% from their 12-month highs).

 

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MID-OCTOBER 2014 CRUISE PRICING SURVEY - EBOLA IMPACT

In mid-October, we saw weak close-in pricing for FQ4 Caribbean itineraries and a still weakening outlook for Europe.

 

 

Please see our note:  http://docs.hedgeye.com/HE_Cruise_Pricing_MidOCT.pdf



Video | McCullough on Fox Business Talks Macro, Markets and More

Here is a series of videos from Hedgeye CEO Keith McCullough’s appearance earlier today on Opening Bell with Maria Bartiromo.


Commodities Weekly Sentiment Tracker

Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.    

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1.       CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.

 

The COTTON, SOYBEANS, and GOLD markets experienced the most BULLISH relative positioning change in the CRB week-over-week

The ORANGE JUICE, SILVER, and ULSD (HO) markets experienced the most BEARISH relative positioning change in the CRB week-over-week

 

Commodities Weekly Sentiment Tracker - chart1 sentiment

 

2.       Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.

  • The CORN, NATURAL GAS, and WHEAT markets are positioned for HIGHER PRICES near-term
  • The RBOB GAS, LEAN HOGS, COTTON, and WTI CRUDE markets are positioned for LOWER PRICES near-term

Commodities Weekly Sentiment Tracker - chart2 spot 2nd month basis

 

3.       Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.

  • The CORN, WHEAT, and SUGAR markets are positioned for HIGHER PRICES in 1-year  
  • The LEAN HOGS, LIVE CATTLE, and COCOA markets are positioned for LOWER PRICES in 1-year  

Commodities Weekly Sentiment Tracker - chart3 spot 1Yr basis

 

4.       Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.

 

Commodities Weekly Sentiment Tracker - chart4 open interest         

 

Ben Ryan

Analyst

            

 


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