Event: CMG reports its fiscal Q1 earnings after the close today. The options are pricing in about a 7.5% move based on the weekly straddle, relative to the 10.75% four quarter average and 7.5% eight quarter average.
Sentiment: During the stock’s 1000% run from the lows in 2009 to the highs in 2012, the stock was universally loved by analysts, but since last year’s highs, and 2 earnings disappointments in Q2 and Q3, the street has cooled on the stock with 10 Buys, 17 Holds and 3 Sells with an avg 12 month price target of ~$350, or about 3% higher than current levels. Short interest sits near 12 month highs at about 12% of the float.
Fundamentals / Valuation: So we know the big kahuna hedge fund manager, David Einhorn, is short this name. There are some piggyback shorts on the back of his idea as well. His thesis is that Chipotle is too expensive relative to the competition, and expects its margins to be hurt as it tries to compete in a commoditized space.
The bull case rests on robust earnings growth projections, as consensus expectations expect 20% earnings growth over the next 3 years. The stock’s P/E is near the midpoint of its lifetime range:
In that period, though, CMG has averaged earnings growth of around 35%. With a lower growth rate projected of 20%, the lower P/E is of course justified. The multiple still looks a bit rich to me, but far more important for the story is the E. What’s the trend in earnings this year? That’s the crux of the story.
Price Action / Technicals:
The 5 year weekly chart of CMG is a textbook example of what happens to a momentum stock when it breaks a longstanding uptrend:
Ever since that break last year, the stock has traded between the 250 and 350 levels for the most part. For now, the stock looks range bound in that range, though obviously quite a wide range for a volatile stock.
Volatility: May vol at 42 is high but not ridiculous. This stock has made some massive moves on earnings before, but at other times done barely anything. 42 in IV seems about fair. The April IV is off the charts but that can be ignored as the earnings moves happens on expiration. The best way to look at April is simply what the straddles are pricing in as far as an expected move. Expect May vol to come into the low 30’s following the report so roughly 25% depending on the direction and size of the move. Here’s the view of IV30 (red) and HV30 (blue) historically:
OUR VIEW: this is not the sort of stock we would own given the de-celerating growth, high multiple and technical set-up. The options market does not appear to be flashing any major divergence btwn sentiment and current fundamentals and there fore we avoid. The largest trade in the name today was a buyer of the Apr 305/290 Put Spread for 2.00, 700x, could be an outright bearish bet, or some protection, expect that is well out of the money.
We are going to continue to poke around for trades that offer a defined risk way to play into the print that offer a favorable risk/reward. We will post anything that we see.