The fundamentals behind the company are truly inspiring. Corporate culture is a very integral part of the business as the company prides itself on its natural wholesome ingredients, responsible farming, community stewardship, and stimulating work place. This culture is passed on to customers who are more likely to go out of their way to stop at Chipotle instead of a competitor because of the values they share with the company.
These values are not always easy to implement and the company has struggled to find enough hormone free meat to supply their entire corporation, but they have been able to at least roll out organic beef market by market and have a goal of completing this rollout in the next few years. All of their chicken is considered organic and fruits and vegetables also are organically grown by select farmers. While this fanaticism about quality results in higher food costs, customers are willing to pay a premium, knowing they are getting a good healthy value. (an interesting question is whether this will remain true if the economy enters a recessionary period in the next year).
Workforce values are also key to the company and this category actually saves them money in the long run. Over the past year, CMG has implemented a “hire from within” campaign that has allowed them to promote line employees to be store managers for the new locations. This results in lower training costs and improves morale and productivity on the line. I applaud the company for the publicity surrounding this strategy as it has a tangible effect on the way customers are treated by more responsible aspiring employees.
The stock is trading at a fairly high multiple assuming the consensus is correct at $1.71 per share for 2007. However, the growth the company has shown has been superb, and it looks as if the opportunity remains for several more years of exciting expansion. Not only are more stores being planned and opened, but the throughput in existing stores is picking up as people become more aware of the concept. Nearly 400 change machines have been installed in stores which help speed up the line in high volume stores during peak periods. This can have a profound impact on number of customers served, and the management is constantly tweaking ideas for how to cut down on line time so customers are served quickly and store capacity is increased.
I expect the stock to continue to trade well and think weakness we are seeing this week (corresponding to a market consolidation) gives investors a chance to pick up what they may have missed after the stock got moving following the quarterly announcement. For those a bit nervous about the multiple, one could sell calls against a long position as the premiums are high and the added layer of protection reduces some of the risk. I should add that I am long the stock in our fund and continue to look for ways to responsibly increase my position.
CMG notes
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FD: I have a long position in CMG
7 comments:
What about competition? The market seems to be flooded with big-burrito places. In the 1990s it was Chinese buffet places, now it's big-burrito places.
I think you're absolutely right about this being a competitive environment. Whenever you have intense competition in a narrow industry, companies have basically 2 choices: 1) compete on price, or 2) differentiate your product.
CMG has chosen #2 and is spending considerable effort being different than every other burritto maker out there. Their higher quality, better customer service, and attractive store environment hopefully will set it apart from Moes, Willys and a handfull of others and allow them to charge a premium price for a premium product.
I could be wrong (it happens frequently) but I think they will compete well.
i agree with your optomism.
the shares have potential to be atleast $99 within 12 months,
but with the shares up about $30 or nearly 50% since the march lows, what short term upside is left in the face of a serious tip threat? boris b
The higher the stock goes, the more risk, obviously, of a pullback. However, if the company is creating new value for shareholders, one should expect the stock to quickly discount that value (rise) as the knowledge becomes public.
From a technical standpoint, it is usually very dangerous to step in front of such a pattern and try to short a stock hitting new highs. When i am long a name that rises quickly, I often take some profits off the table, but want to leave a good bit on because stocks that appreciate quickly often move much farther than i would have originally thought.
Curious what first month you opened long(s) positions of Chipotle's A shares or B shares? Also, your #2 point, diffrentiate, is totally 100%. Chipotle's has a secret sauce borders devine pefection. but the clones Qdoba, Baja fresh, La salsa, and maybe eveb Moe's no way. not even close. Boris
Borris,
I actually indicated for a significant amount of stock on the IPO but got shut out. I was pretty upset as it did well and I usually at least get a little stock in these deals. After that I waited (a long time) for the stock to build its first true base and then bot back involved April 9 when it looked like it was breaking out of its first base. I was a bit early but benefited when at the end of the month the company had a great earnings announcement.
I trade the "A" shares (ticker CMG) as that is where most of the liquidity is, and where the options are available to hedge if necessary.
Hey, been a while since i checked in. keeping your blog on the fav list. Did you know that CMG "a" & "b" had there first $10 dip about 10 trading days ago? Bring the shares down to the 50 day SMA and the lower Bollinger Band, and the downgrade seems to be a mistake. Since then 3 houses picked up coverage with favorable but sometimes conservative price goals. Citigroup, Lehman, S&P. Also on Fast Money, CNBC 8pm EST, 7 trading days ago, wednesday, the CFO was a "phone" guest and they interviewed about the threat of commodity cost chewing into the quarterly momentum. The CMG CFO said they survived the price upticks in the first quarter and reiterated that many items in the income statement (costs) have lasting favorable trends. After that all 4 panelist gave it a thumbs up. Even commodity guru Eric Bollin, who always adverse to any company that used commodities like oil. Thats 4 buy ratings in a row over past 2 weeks. After all that excitement the bounce in the "a" shares became $8 to $87. with a little profit taking last tuesday/thursday back down to $82.50, and a friday snap back to 85.45 by the end of the day.
Now what??
I understand the fundamentals better then the techniquals. But i believe that for the "a" shares that $80 is a low end plateau and there should be able to uptick from there. But how much in next 30 days? what is your upside price goal both before and after earnings? is 88-92 a fair objective? bonus.... if you hunt on EBay, the 2007 Chipotle Free Entrees Banko Notes, worth about $6.25+, and even $8+ in manhattan/boston are auctioning for $4-ish+. Boris B. fort pierce florida.
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