Event: CMG reports its Q3 results tonight after the close, and the options market is implying about a 7.5% one day move. Over the last 4 qtrs, the avg one day move has been about 11.5%, and the 8 qtr avg is 10.8%. Only two out of the last eight one day post-earnings moves have been lower.
Sentiment: Wall Street analysts remain fairly neutral on CMG shares, despite the stock’s massive year to date out performance (up 22.5% year-to-date). They have 7 Buys, 14 Holds and no Sells on the stock, with an avg 12 month price target of about $722, or 10% higher than current levels. Short interest sits at about 3.3% of the float.
Options Open Interest: Total open interest on the surface for a $20 billion market cap company does not seem particularly high. There are a total of 66,000 contracts outstanding, with calls outnembering puts 1.30 to 1. Compare that to YUM Brands which has a $30 billion market cap, and trades at $68.50, or one tenth of the stock price of CMG, it has total open interest of about 194,000 contracts. So CMG has about 3x the notional open interest as YUM.
Volatility Snapshot: Despite the implied earnings move being well below the 4 and 8 qtr averages, prices of options in CMG are not particulary cheap, with 30 day at the money implied vol a few points below the highs of the year, above the levels prior to the Q2 announcement in July:
However, the implied move of 7.5% is a bit below the recent averages, so options traders are not pricing in a major gap on the event.
Price Action / Technicals: As I mentioned above, the stock has been a massive out-performer compared to the broad market and most of its peers, up 22.5% ytd. With YUM down 8%, MCD down 7%, PNRA down 4% and SBUX down 5% on the year, CMG’s performance is that much more impressive.
Looking at the chart, there are really just 2 levels to concern yourself with. First down about 8%, just below $600 (red circle), FROM where the stock gapped higher following its Q2 results in July, which would also correspond with the stock’s 200 day moving avg (yellow).
And then there is $500 (green line), TO where the stock gapped following its Q3 results last October:
On the upside, the all-time high is $697.93 from August.
Our View: We are fairly certain we know how the great run in CMG of the last few years ends…in tears sadly. Unforunately for our own trading, the timing is not that certain. Trying to short CMG on valuation has been a sort of widow-maker trade. For instance, earnings and sales growth declerated in 2013 from 2012 from 29% to 20% and 20 to 18% respectively, which caused some (me included) to suggest that deceleration with P/E multiples nearly 2x that expected growth would cause investors to rethink their bullish thesis. Well the stock rose nearly 80% in 2013, making morons out of anyone who took a dim view on the prospects of the stock.
Well growth re-accelrated in 2014, with expectations for 2014 to be 31% in eps and 27% in sales, justifying to many its earnings multiple of 47x this year and 37x next.
I still don’t see it, it is a burrito company selling at 37x earnings.