Chipotle Mexican Grill (CMG) Finally Gets Hit

I've been unable to participate in my bearish call on restauraunts [Sept 19 - Tough Times Ahead for Restaurants?] since I cannot short individual stocks; and there is no short restauraunt ETF. As good as performance has been it would of been really turbocharged with some of the short calls in retail and restauraunts.

Middle class consumer squeezed along with skyrocketing inputs for their food doesn't bode well for profit margins in this group as a whole. We have the cheese inflation, the dairy inflation, the corn inflation and now the wheat inflation.

One name I highlighted was Chipotle Mexcian Grill (CMG), since it is the 1 name in the sector with actual growth.... first in that Sept 19th blog entry when I wrote:

I have been looking at Chipotle Mexican Grill (CMG) due to demographic trends in the US, it's great fundamentals, management style, and move from a regional to national brand - however I think this might be a better play in a few quarters so I am going to hold off. Chipolte just spiked up to $115 today, so let's check back down the road to see if this caution was misplaced. Add to the fact its now trading at nearly 60x 2007 earnings and its hard for me to get excited at these valuations, but for the next 5 years it's one to watch.

Then in its own entry later [Oct 30 - Chipotle Mexican Grill (CMG) - The One Impervious Restaurant Stock]

Chipotle is apparently the teflon stock in the sector, with a super (considering the headwinds) report. That said, at >60x 2007 estimates it's priced as a teflon stock. And they didn't say much about the cost of inputs like cheese, but they are the growth stage of expansion where apparently they can laugh mockingly at the increases.

Just too pricey for me especially in this economy and the economy over the next 18-24 months. Hopefully analysts will question on the conference call just how much the rising food inputs are costing them, and if they are passing it along to the consumer and in what degree. And if their forecast for future food prices are part of the reason they are guiding so low in 2008. Or just a slowing economy... as people make McDonald's their sit down 'restaurant' of choice as we all get slowly poorer with our more useless pesos, err dollars.

Well the stock held up quite well despite watching all its comrades fall in this environment - but reality finally hit them last night in their earnings report. So I suppose if you played Russian Roulette and held the stock...and held... and held... and got out at the exact right time you did very well. But the risk/reward just was never there, as I said at $115 (Sept) and $135 (Oct).

• Shares of Chipotle Mexican Grill Inc. plunged in premarket trading Friday after the restaurant chain's fourth-quarter profit and sales fell short of Wall Street expectations.
• Chipotle's profit increased 62 percent in the last quarter of the year, while revenue grew 32 percent, but both totals were slightly below analyst estimates. The company also forecast more modest profit growth in 2008, saying it is aiming for improvement of at least 25 percent.
• At least three analysts, including Glen Petraglia of Citi Investment Research, lowered their price targets on the stock Friday. Petraglia said Chipotle is reporting higher spending and lower profit margins, and said he is concerned about the effects of the slowing U.S. economy and high ingredient costs.
• Other analysts appeared satisfied with the results, with David Tarantino of Robert W. Baird upgrading the stock to "Outperform" from "Neutral" despite the miss. Tarantino said Chipotle is doing well despite high ingredient costs, and noted that the company's same-store sales grew 10.6 percent for the quarter.

A few points:

1. Any analyst downgrading now is the typical Wall Street guy. Taking you out of the name after the fact. Gee thanks folks. The stock is down from $155 in December 07, and $135 a month ago. Where were you then?
2. Relatively speaking Chipotle is still doing very well. Best house on a very tough block. But, from a stock perspective expectation were (and probably are) still too high. If analysts are frightened of people abandoning cheapo places like McDonald's (MCD) due to the economy, how can they support Chipotle Mexican Grill which is more of a casual dining place? (or fast-casual as they like to say)
3. I continue to believe the entire analyst community in sector after sector is behind on this profit margin squeeze due to higher commodity costs. Just like they missed this first wave that has begun hitting. And I still believe 2008 estimates are too high - although when we rally we rally on "cheap stocks" and "CEOs assure us that they can hit 2008 estimates"; the same CEOs missing estimates they gave 3 months ago - but we are to believe them 9 months out. Kool Aid. And this goes for many sectors. This is why the market "looks cheap"; earnings for 2nd half 2008 are still a hoax in my opinion. As inflation pervades, either these companies are going to have to force feed higher costs down the struggling consumers throat (bad for consumer - and this will lead to demand destruction which eventually hurts producers) or they are going to have to eat the costs themselves (bad for producer). Neither is good for the economy and much like higher gasoline prices, inflation is a terrible tax on us all.
4. But none of it matters, because inflation doesn't matter as we have to save our banking system from their terrible decision and 'innovations'.

This 6 month chart is what we call a round trip ... and highlights why buy and hold investors are simply being crushed in this environment.

No positions