Event: CMG reports full Q4 earnings after the close tonight. The options market is implying about a 6.5%* move vs the 4 qtr avg of about 10%. The implied move appears light to historical moves as the company already pre-announced a disappointing Q4 on Jan 15th (read release here).
* with the stock at $310, the Feb 8th weekly 310 straddle is offered at about $20, or about 6.5%, that is the move you would need by Friday’s expiration to break-even if you bought the straddle.
Price Action / Sentiment: the stock has since rallied 16% since gapping down after the pre-announcement and is now trading at 4 month highs and surprisingly is up 4% on the year.
The street remains very mixed on the name with 8 Buys, 18 Holds and 4 Sells, with an avg 12 month price target of ~$322. Short interest has ticked up to 52 week highs at about 11.5% of the float.
Technicals: After the very low vol, yet near parabolic AAPL-esque breakout in the first half of 2012, the company had a series of high profile earnings misses that caused a very sharp almost 50% peak to trough decline in less than 6 months. The stock has since recently broken this downtrend channel and could be setting a new support range at $300.
[caption id="attachment_22351" align="aligncenter" width="589"]
CMG 2 yr Chart from Bloomberg[/caption]
Fundamentals / Valuation: Some of the company’s recent earnings woes are the result of higher food costs, weighing on margins, while some would argue that Taco Bell’s higher end menu has taken its toll on the North American focused burrito maker. Whatever combination of the issues affecting growth, investors who were paying 45x expected earnings hit the pause button at the slightest whiff of deceleration. Earnings growth is expected to nearly be cut in half year over year, and investors likely to stay on the sidelines committing new capital until they get a sense for the company’s plans to open more stores and re-accelerate growth. At 30x 2013 earnings, CMG trades at a hefty premium to both MCD and YUM.
Vol Snapshot: Volatility has been steadily rising into the event but not on levels we’ve seen in the past when the stock was a little more bubbly. Here’s a look at the past 2 years and implied vol vs realized vol:
IV30 vs HV30 from LiveVol Pro[/caption]
The Feb weekly vol stands at about 90 with the atm straddles over 20 dollars. Feb regular vol is in the 50’s and March in the 30’s. Expect March and outer month vol to settle in below 30 following the event.
My View: It is a tough set up here into tonight’s print, yet investors clearly seem to be discounting near term risks to guidance given the rally in the last 2 weeks. It seems a bit like a sucker play to assume that the stock will give back a bit of the recent bounce on guidance that is below expectations. So the big question is whether consensus estimates have come in enough? Analysts expect earnings to grow 17% in 2013 and sales to grow 15%. The stock trades at 30x expected earnings, which certainly ain’t cheap for a burrito company with rapidly decelerating growth. Much like AAPL, the stock is broken, and investor euphoria has abated. If the company guides inline or higher than consensus, the gap from Oct to the gap last month could serve as a intermediate term bottom for a stock/company that exhibited a fabulous boom then mini bust. But even the company guides lower for 2013, a revisit of the lows is easily in the cards. Bottoming is a process and this is not one that appears to have turned on a dime, but the higher highs and higher lows since the Oct lows could signal stabilization.