Is Chipotle a Buy?

With shares of Chipotle Mexican Grill (NYSE:CMG) trading around $550, is CMG an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Chipotle Mexican Grill operates restaurants throughout the United States, as well as two restaurants in Toronto and two in London. The company’s restaurants serve a menu of burritos, tacos, burrito bowls, and salads. Chipotle Mexican Grill manages its operations and restaurants based on six regions that all report into a single segment. It prides itself on serving the best possible ingredients during a time when consumers are more keen to this detail.

Chipotle has become the standard for restaurant perfection, as not even bad winters and intense promotional activity can keep its growth from exceeding 20 percent-plus year over year. But perhaps most impressive is the fact that in the first quarter, when all of these hardships existed, Chipotle’s comparable sales rose 13.4 percent. In comparison, fast-casual peers like Noodles & Co. (NYSE:NDLS) and Potbelly (NYSE:PBPB) saw their comparable sales decline 1.6 percent and 2.2 percent, respectively, in the same period.

T = Technicals on the Stock Chart Are Strong

Chipotle Mexican Grill stock has been trending much higher in the last couple of years. The stock is currently moving higher and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Chipotle Mexican Grill is trading above its rising key averages, which signals neutral to bullish price action in the near-term.

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Chipotle Mexican Grill options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Chipotle Mexican Grill options

32.19%

93%

90%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of Tuesday, there is average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Chipotle Mexican Grill’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Chipotle Mexican Grill look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

7.76%

30.08%

17.18%

10.16%

Revenue Growth (Y-O-Y)

24.41%

20.74%

18.04%

18.22%

Earnings Reaction

-5.93%

11.74%

16.09%

8.55%

Chipotle Mexican Grill has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Chipotle Mexican Grill’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Chipotle Mexican Grill stock done relative to its peers – Panera Bread (NASDAQ:PNRA), McDonald’s (NYSE:MCD), and Yum Brands (NYSE:YUM) — and sector?

Chipotle Mexican Grill

Panera Bread

McDonald’s

Yum Brands

Sector

Year-to-Date Return

3.2%

-12.7%

4.71%

3.99%

-1.2%

Chipotle Mexican Grill has been an average performer, year-to-date.

Conclusion

Chipotle Mexican Grill provides consumers with quick, delicious, and healthy food options on a daily basis. The company is almost certain to exceed analyst expectations for the current quarter and boost guidance. The stock has been trending much higher in the last couple of years and looks poised to continue. Over the last four quarters, earnings and revenues have been on the rise, which has left investors pleased. Relative to its peers and sector, Chipotle Mexican Grill has been an average year-to-date performer. Look for Chipotle Mexican Grill to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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