CMG - A SHORT AHEAD OF THE QUARTER?

Conclusion: All of the channel checks and analyst calls about how great things are and I still come out that the stock has gone parabolic (as Keith said, the chart looks like Sri Lanka - this has nothing to do with anything other than the charts look alike).  While expectations are lofty, CMG is not giving away gold.

 

Keith asked me in our morning meeting if he should short CMG ahead of the quarter.  While we have traded around the CMG short, we covered it last at $140, for a small profit.  

 

With the stock now over $180, trading at 14.5x NTM EV/EBITDA and 32x NTM EPS, the million dollar question is - where is it going from here?

 

I told Keith that CMG could be the restaurant industry version of insane expectations – à la AAPL, but is probably not a GOOG (in terms of post earnings performance).

  1. Quarterly and annual estimates have been creeping higher - expectations are lofty! The stock is up 35% in the past three months. 
  2. In 1Q10 the EPS surprise factor was 25% and comparable sales came in +4.3% versus expectations of +1%; the stock increased 14% the day after results were reported.  The company reported on 4/22; from 4/20 to 4/26, the stock price rose 14.4%.
  3. In 2Q10 the EPS surprise factor was 5% and same-store sales were up 8.7% versus the street’s 5.4% estimate; the stock was up 9.0% the day after results were reported.  The company reported on 7/23; from 7/21 to 7/27, the stock price rose 14.4% (again).
  4. Expectations are now for an 8% comp (implies relatively flat two-year average trends with the prior quarter) with some estimates approaching 10%. The chance of again beating the same-store sales consensus estimate by 300 bps is small; business is good but not that good.
  5. Higher YOY labor and marketing costs, along with modest food cost inflation, will put increased pressure on restaurant level margin in 2H10, but this seems to be a high quality problem and also a function of tough comparisons.
  6. CMG is expected to provide some guide posts for 2011 and incremental margin pressure is inevitable - commodity exposure!
  7. Unit growth is on track but I don’t seen an acceleration
  8. This is the last quarter of easy traffic comparisons
  9. Upside/Downside is $6/$37.50

Surprisingly, the short interest on CMG is only 12.9% of the float versus 18.8% back in December 2009 and only up slightly since the beginning of the quarter.

 

Obviously, CMG is on a roll and is loved by “growth” investors.  Yes, the trends are strong, but at some point we need to realize that it’s just a restaurant company and this growth will inevitably slow.

 

As I said earlier, estimates have been moving higher and at this point, expectations seem to have caught up with this name.  The company’s stock has move higher following the prior two quarters’ earnings reports, but with estimates increasing, I think it will be difficult for the company to maintain its recent magnitude of both same-store sales and earnings surprises when it reports 3Q10 numbers tomorrow after the close. 

 

I would not be surprised to see CMG report a +8% to +9% comp, which would be impressive, although also relatively in line with consensus.  To that end, I am not expecting a repeat of the 300 to 400 bp upside comp surprise like we saw in 1Q10 and 2Q10.  This 8% to 9% comp would imply flat to slightly stronger two-year average trends, rather than the nearly 200 bp acceleration the company experienced during the second quarter.  That being said, I don’t expect the same level of earnings upside relative to the 25% surprise in 1Q10 and the 5% surprise in 2Q10.  Although the street’s comp estimate seems reasonable, the 3Q10 consensus EPS estimate of $1.31 will be more difficult to achieve, or at the very least, more difficult to surpass by a meaningful amount.

 

CMG - A SHORT AHEAD OF THE QUARTER? - cmg stock chart train

 

CMG - A SHORT AHEAD OF THE QUARTER? - sri lanka stock chart flag

 

Howard Penney

Managing Director