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Shares of Chipotle Mexican Grill (NYSE:CMG) are now trading at around $240 per share following the fast-casual restaurant chain’s third quarter earnings report. Is CMG a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
Investors reacted swiftly and negatively on Thursday after Chipotle released its disappointing numbers for the fiscal third quarter. Both earnings per share and revenue failed to meet the levels analysts were expecting, and the stock price has been dropping as a result of the poor performance.
Also working against Chipotle stock’s favor is the dreaded “Einhorn Effect.” Earlier this month, billionaire hedge fund manager and stock-pick-celebrity David Einhorn shorted Chipotle, highlighting stiff competition and increasing food costs as reasons why Chipotle was ripe for a downward skid.
T = Technicals on the Stock Chart are Weak
As of October 19, 2012, the stock price is 20.20 percent below its 20 Day Simple Moving Average; 21.28 percent below the 50 Day SMA; and 34.20 percent below the 200 Day SMA. Since the beginning of 2012 the stock price has been in a downward trend and is down 15.34 percent year-to-date and down 7.84 percent year over year.
E = Earnings Are Not Increasing Quarter over Quarter
Chipotle’s earnings had been steadily growing over the last three quarters, but the most recent quarterly number of $2.27 per share showed a sudden drop from the previous quarter’s $2.56 per share. However, earnings still beat the year over year EPS of $1.90.
Since earnings are not consistently increasing quarter-over-quarter, the stock is currently too high for our risk profile.
E = Excellent Relative Performance to Peers is Not Evident
Many investors favor Return on Equity as a key metric to how well the company is operating. Chipotle’s operational performance isn’t measuring up with peer company comparisons. CMG has an ROE of 23.84 percent while rival Yum! Brands – which owns the Taco Bell, KFC, and Pizza Hut brands – comes in much higher at 77.14 percent and McDonald’s has an ROE of 37.93 percent.
Operating margins are also critical for stock evaluation. Chipotle fares a little better compared to competition with a margin of 16.98 percent compared to 16.89 percent for Yum! Brands, although McDonald’s leads the pack with a margin of 31.45 percent.
Whether Einhorn was right, or whether he helped create the problems to begin with by blasting the stock, Chipotle faces real challenges going forward as it hopes to return to the high levels of growth it once enjoyed. The competition won’t be getting more lax any time soon, and could potentially use this opportunity to hit Chipotle while it’s down.
For all these reasons, Chipotle’s hot start to 2012 seems to be a thing of the distant past. Bold investors might scoop up shares while prices are low, but right now, Chipotle’s magic appears to wearing off, as share prices are down 37 percent from just three months ago.
All told, Chipotle looks like a SELL or STAY AWAY based on the key metrics above.
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