Hedge fund titan David Einhorn has been on fire in recent years with his bearish calls (Lehman Brothers, St Joe, Green Mountain, etc) and his latest presentation at the Value Investing Congress detailed a negative outlook for Mexican fast casual restaurant chain Chipotle Mexican Grill (CMG). Some of his points on CMG were easier to agree with (sky-high valuation, slowing growth, pricing pressures) than others (a strong competitive threat from Taco Bell?) but he nailed another one of his calls. CMG shares are falling $30 today after the company reported a disappointing quarter last night. The stock now sits just above $250, down from a high of $442 hit in April of this year.
Chipotle stock long surpassed any level that I consider a good value, but as its recent descent continues, it makes sense to at least pinpoint a price at which it might warrant consideration on the long side. After all, the company still has a very attractive longer term unit growth outlook, is likely to remain very popular with consumers, and the company sports one of the highest operating margins I have ever seen generated by a restaurant company (27% unit-level operating margins).
The reasons for the stock’s decline lately are completely justified even though they don’t really impact the long-term business outlook for the company. The valuation was crazy before (at $442 per share it traded at a 50 forward P/E ratio) and comp sales growth of high single digits or more was definitely not sustainable. Yesterday the company offered 2013 guidance of 12% unit growth and indicated comps could be flat. While such an outlook will hurt shares short term, longer term it is not terribly worrisome.
With the stock now down more than 40% from its high, I do not think it is far off from a fair price, though it is not quite there yet. If the shares fell to around the $225 level, which equates to about 12 times cash flow, I would start to get interested. This is definitely one growth company to watch, as negative business momentum short term could very well send the stock down to value territory if investors’ disappointment continues.
Kudos to David Einhorn for another timely call. I would never suggest investors’ blindly follow any investor, but Einhorn is clearly one of the best around right now and it worth paying attention to when he gives public presentations. We can all learn a lot from him.
Full Disclosure: No position in any of the companies mentioned at the time of writing, but positions may change at any time