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Penney: Why Chipotle Could Fall 25% Or More | $CMG

Takeaway: After surveying the damage, Hedgeye Restaurants analyst Howard Penney thinks Chipotle shares are worth $350 to $400.

Penney: Why Chipotle Could Fall 25% Or More | $CMG - chipotle cartoon

 

If you are a Chipotle shareholder you probably had a bad weekend. 

 

After the market closed Friday, Chipotle (CMG) released an 8-K detailing what the company is going to do to fix the issues it faces, including the impact of the E. coli outbreak that spread to stores nationwide. (Click here to read a brief recap of "The Bear Case Against Chipotle")

 

The expected "E. coli impact" on Chipotle's earnings was staggering:

 

  1. Comparable restaurant sales to be in a range of -8% to -11%
  2. Diluted earnings per share in the range of $2.45 to $2.85, versus consensus of $4.05
  3. Plus this- "We are also rescinding our previously-announced 2016 outlook for comparable restaurant sales increases. In light of recent sales trends and additional uncertainty related to the E. coli incident, we cannot reasonably estimate 2016 comparable restaurant sales at this time."

CMG shares took another hit today falling 3%. 

 

It's not done falling either. As Restaurants analyst Howard Penney writes, "We expect the swift decline in same-store sales caught management off guard and they are unprepared to deal with the severity of the problem." 

 

penney lays out his bearish thesis in the video below:

 

Why? To be clear, there are still a lot of unanswered questions. Here are a few from Penney's research note sent to institutional subscribers yesterday:

  1. Can the company grow its units at the same rate and deliver on consumer and investor expectations?
  2. What is the long-term damage to the Chipotle brand?
  3. Will the company need to adjust its non-GMO claims?

"The direct impact of a more humble management team will be a company with a lower margin structure and a significantly slower unit growth rate. CMG is just another restaurant company and the management team needs to realize that," he writes.

 

Bottom Line: Penney thinks the stock is now worth between $350 and $400.

 

 

To access Penney's more detailed institutional research note on Chipotle or his team's other research email sales@hedgeye.com.


Kaiser: Kinder Morgan Shares Are Worth Less Than $10 | $KMI

Editor's Note: Below is an excerpt from a note written last night by Hedgeye Energy analyst Kevin Kaiser to institutional subscribers. For the record, Kinder Morgan (KMI) has fallen another 7.5% today.

 

"The market has suddenly come to appreciate many of the risks and issues with Kinder Morgan, Inc. (KMI) that we have discussed for more than two years.  KMI was down 30% last week and is now down 60% YTD on heightened concerns surrounding its debt leverage, dividend sustainability, business model, and valuation.  And because KMI is a bellwether in the North American midstream sector, the recent declines of its stock and bond prices are reverberating through its peer group, as evidenced by the Alerian MLP Index falling 11% last week.

 

While some investors will be tempted to catch the KMI falling knife, we continue to strongly advise against it.  In our view, there is still substantial downside to fair value, which we believe is less than $10/share.

 

We will host a conference call presentation this Friday, December 11th at 11am EST to discuss the latest KMI developments and give our updated views on KMI’s businesses, financials, and valuation." 

 

(For more info on how you can access his call send an email to sales@hedgeye.com.)

 

*Here is the Fox Business interview between Kaiser and Charlie Gasparino on KMI almost 2 years ago.  

 

Must reads on Kaiser's Kinder Morgan call:

*UPDATE: Since Cramer's buy recommendation last week (see last link above), KMI shares have fallen another 30%.

 

 


RTA Live: December 7, 2015

 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Monday Mashup

Monday Mashup - CHART 1

 

We are adding Dave & Buster’s Entertainment (PLAY) to the Hedgeye Restaurants SHORT bench. Over the coming weeks we will walk through our fundamental thesis on why we are BEARISH on PLAY.

 

RECENT NOTES

12/6/15 CMG | STARTING TO COME CLEAN

12/1/15 DFRG | HEADED NORTH

11/23/15 Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities)

11/23/15 CMG | SHORT THE FUNDAMENTALS

11/20/15 WEN | REMOVING THE SHORT | GOING LONG

 

SECTOR PERFORMANCE

Casual Dining and Quick Service stocks that we follow outperformed the XLY, last week, which was down -0.3%. Top performers on a relative basis from casual dining were DFRG and BWLD posting increases of +2.2% and +1.1%, respectively, while YUM and PNRA led the quick service group this week up +4.7% and +2.3%, respectively.

Monday Mashup - CHART 2

Monday Mashup - CHART 3

 

XLY VERSUS THE MARKET

Monday Mashup - CHART 4

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLY looks BULLISH from a TRADE and TREND perspective, TREND support is 78.42.

Monday Mashup - CHART 5

 

CASUAL DINING RESTAURANTS

Monday Mashup - CHART 6

Monday Mashup - CHART 7

Monday Mashup - CHART 8

 

QUICK SERVICE RESTAURANTS

Monday Mashup - CHART 9

Monday Mashup - CHART 10

Monday Mashup - CHART 11

 

COMMODITIES

Monday Mashup - CHART 12

Monday Mashup - CHART 13

Monday Mashup - CHART 14

Monday Mashup - CHART 15

Monday Mashup - CHART 16

Monday Mashup - CHART 17

Monday Mashup - CHART 18

Monday Mashup - CHART 19

Monday Mashup - CHART 20

 

Keith’s Three Morning Bullets

In rate of change terms, at 1.88% y/y that was the slowest NFP print since the cycle peaked in Q1, but the Fed is going to hike on that:

 

  1. EURO – that’s why I signaled buy USD on last week’s Euro ramp of +2.7% - it’s back down -0.6% this morning to $1.08 and has no immediate-term support to $1.05; the data doesn’t matter to the Fed – the SP500 does
  2. OIL – #StrongDollar (rate hike catalyst DEC 16th) driven #Deflation Risk definitely matters to most asset classes – after a -3.8% decline last week, Oil is down another -1.1% this morning to $39.53 and the Commodities complex remains in crash mode
  3. EM – Japanese Equities +1% on the Dollar Up move overnight – EM Asia continued lower (no likey Up Dollar); Thailand -0.7% (-6.4% in the last month is one of the ugliest); EM (MSCI Index) deflated another -0.9% last wk to -14.3% YTD

 

SPX immediate-term risk range = 2057-2112; UST 10yr Yield 2.19-2.33%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

12/6/15 NUS | DIGGING A DEEPER HOLE

11/24/15 NUS THOUGHT LEADER AUDIO REPLAY

11/24/15 THOUGHT LEADER CALL MATERIALS | NUS | ON NOTICE

11/18/15 CAG | SMOOTH MOVES

11/13/15 NUS | SHOW ME THE MONEY!

 

SECTOR PERFORMANCE

Food and organic stocks that we follow underperformed the XLP last week. The XLP was up +1.0% last week, the top performers on a relative basis from our list was Hormel (HRL) and Lifeway (LWAY) posting increases of +2.5% and +1.0%, respectively. The worst performing companies on a relative basis on our list were Amira Natural Foods (ANFI) and Flowers Foods (FLO), which were down -22.6% and -8.1%, respectively.

Monday Mashup - CHART 2

 

XLP VERSUS THE MARKET

Monday Mashup - CHART 3

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLP is BULLISH in the TRADE and TREND duration.

Monday Mashup - CHART 4

 

Food and Organic Companies

Monday Mashup - CHART 5

Monday Mashup - CHART 6

Monday Mashup - CHART 7

Monday Mashup - CHART 8

 

Keith’s Three Morning Bullets

In rate of change terms, at 1.88% y/y that was the slowest NFP print since the cycle peaked in Q1, but the Fed is going to hike on that:

 

  1. EURO – that’s why I signaled buy USD on last week’s Euro ramp of +2.7% - it’s back down -0.6% this morning to $1.08 and has no immediate-term support to $1.05; the data doesn’t matter to the Fed – the SP500 does
  2. OIL – #StrongDollar (rate hike catalyst DEC 16th) driven #Deflation Risk definitely matters to most asset classes – after a -3.8% decline last week, Oil is down another -1.1% this morning to $39.53 and the Commodities complex remains in crash mode
  3. EM – Japanese Equities +1% on the Dollar Up move overnight – EM Asia continued lower (no likey Up Dollar); Thailand -0.7% (-6.4% in the last month is one of the ugliest); EM (MSCI Index) deflated another -0.9% last wk to -14.3% YTD

 

SPX immediate-term risk range = 2057-2112; UST 10yr Yield 2.19-2.33%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


Retail Callouts (12/7) | KSS Credit Income

Takeaway: KSS Credit Income = The only number we really care about from 10Q. Poses significant risk to earnings, transcending the credit cycle.

KSS - Credit Income

Kohl's released its 10-Q after the close on Friday, giving us a look at the only number we really care about -- KSS' Credit Income -- which is up only $2mm over last year and is leveling off on the margin. We outlined in a note on 11/10 (KSS | Here’s Why KSS Is Expensive) why this line item transcends the credit cycle, and poses significant risk for KSS earnings -- even if top line growth stays in tact. The crux is that KSS is more fully-penetrated in its core customer than perhaps any other major retailer at 75%. Credit Card companies will no longer underwrite KSS' growth into an incrementally more marginal consumer base, so KSS is going solo with it's own rewards program. Our research shows that this is leading to cannibalization in credit income growth, which should result in significant SG&A deleverage in the model. By 2018, we've got KSS clocking in at $3.00, less than half of the Street at $6.25.

Retail Callouts (12/7)  |  KSS Credit Income - 12 7 2015 chart1

 

 

RH - The Next Disruptor: Restoration Hardware Entering Fashion Business

(http://wwd.com/retail-news/specialty-stores/restoration-hardware-fashion-clothing-gary-friedman-10289027/)

 

AMZN - Amazon Buys Semi-Truck Fleet to Shuttle Inventory

(http://blogs.wsj.com/digits/2015/12/04/amazon-buys-semi-truck-fleet-to-deliver-packages/)

 

TGT - Target and ABC team up for some magical marketing around Mary Poppins

(http://www.retailingtoday.com/article/target-and-worlds-favorite-nanny-team-some-magical-marketing)

 

WSM - Founder Of Williams-Sonoma Dies At Age 100

(http://www.forbes.com/sites/kathleenkusek/2015/12/05/founder-of-williams-sonoma-dead-at-100/)

 

WMT - Wal-Mart Sues Puerto Rico Over ‘Astonishing’ Tax Increases

(http://www.bloomberg.com/news/articles/2015-12-05/wal-mart-sues-puerto-rico-over-astonishing-tax-increases)

 

ETSY - Etsy Bug Results in Late Payments to Sellers

(http://www.ecommercebytes.com/cab/abn/y15/m12/i07/s01)

 

M - Bloomingdale’s to Add PHM Saints Pères Shops

(http://wwd.com/menswear-news/retail-business/bloomingdales-phm-saints-peres-pierre-henri-mattout-kevin-harter-pop-up10290138-10290138/)

 

J.Crew names Michael J. Nicholson as president, COO and CFO

(http://www.chainstoreage.com/article/woes-persist-jcrew-names-retail-vet-cfo-and-president)

 


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