Pete (Puddinhead42) asked some questions on an LGIH thread, so I’m reposting my response here as well to keep the threads separate on the 2 companies, as I think CMG is a good one to watch in the coming months.
First and foremost I am considering an investment in Chipotle as it begins to seem more reasonably priced, so did you and your friends eat at CMG in the past, has that changed since the E Coli scare, and if so do you think you will return to old habits at some point (when).
I used to eat there a lot as did a lot of my friends. Over time, the food quality has decreased though it still fits in that quality fast food at a decent value for what you get… but you can tell that even with their commitment to quality, it suffers a bit at their current scale. You can get much better mexican food almost anywhere. I think of it as mexican inspired american food. Lines used to be out the door during lunch time but since the e coli thing the locations are surprisingly slow and I have not gone into one myself.
I do realize that it’s likely completely safe and that there really have been that many cases given their scale, but it’s a big image problem and there are so many other alternatives out there so people will think twice. I actually got a minor case of food poisoning at a CMG many years ago when it was fairly new. After that I stayed away for a few months, but then went back.
I think its a great company but not yet to a price for a great investment. I’d be surprised to see good earnings and I think it may take a few quarters for this to blow over. I could see getting a small starter position soon, but I think there will be chances to buy under 400. It was too priced for perfection and I think comps will be lower than expected in the near term. For disclosure I have a put butterfly spread on CMG at the moment and may add some put verticals to carry through the next earnings release.
I agree. I still eat at CMG about once a week, sometimes twice.
However, I see very clearly that the traffic in my location, in a heavy populated part of manhattan, has dropped off dramatically from what it was like a few months ago.
Six months ago, the line during the peak lunch time was almost out the door (which is a long way at this location) and it was still often about half that long during less peak times. However, for the past two months, there is almost never a line, even at the busiest peak lunch times, maybe there will be 2 or 3 people waiting to order, when it should be most busy, while there used to be 25-30 or more people waiting.
That’s a very small sample size, but this is in NY where there haven’t even been any E Coli issues as far as I’m aware. Based on that, I’m expecting this quarter to be really bad, even worse than what is probably already priced into the stock, and I wouldn’t be surprised if things are slow through much of next year.
Chipotle is a stock that I sold way too early after a quick double, still at a fraction of where it is today and I’ve always hoped for a good opportunity to get back in. I’m still hoping for that opportunity, but it would have to be quite a bit lower than where we are today unless I see a dramatic change in foot traffic at local restaurants for me to get back in anytime soon. I personally would be more likely to short CMG today than I would to go long (although I won’t).
I have been to four Southern California CMG locations in the last two months.
Traffic appears to be half what it used to be at noon.
They also have cut the staff by nearly half.
Slower service, there were only two people on the assembling line.
Sales will be down, employee costs will be down.
Which will be more, my vote is sales!
Here in Ohio CMG has been 1/4 of the lines at the busiest times. That is over 10-15 locations that I go around too.
With their Carnitas issue, I stopped going for months and have only been back once since as it seems as the food quality has not been there and also more spicy.
I am watching CMG now as well but think there is still plenty of time for shares to continue down. Given the number of reports on the MF boards that traffic is down 20-50% and I would guess down at least 40% at the 2 restaurants near me I think we will get a better entry.
Granted these are subjective observations but assume a 50% cut in EPS and they only hit 2.20 this next quarter to come in at 15.13 for the year it still leaves a PE of nearly 30 on y/y EPS growth of about 7.5%. I think we still have downside until we get closer to this time next year when comps will be much easier to beat.
“Over time, the food quality has decreased though it still fits in that quality fast food at a decent value for what you get… but you can tell that even with their commitment to quality, it suffers a bit at their current scale.”
I eat to Chipotle quite often and I never found that the quality decreasing. I am always amazed of the consistency in quality. I think it is even more difficult to achieve when they do not use any processed ingredients. You will never find a wilted piece of lettuce in your burrito or in your bowl.
As to getting better Mexican food elsewhere…sure you can. Chipotle has Mexican inspired flavors but you will not go there is you want ‘real’ Mexican food. It is a different comparison.
I like CMG at these levels. I think it still have growth in it.
Given the number of reports on the MF boards that traffic is down 20-50% and I would guess down at least 40% at the 2 restaurants near me I think we will get a better entry. Granted these are subjective observations but assume a 50% cut in EPS.
Hi Ray, If there really is a 50% decrease in sales, you have to figure at least 75 to 100% decrease in profits for the quarter as they have a lot of fixed costs that don’t go down. For example rent, telephone, heat, cleaning services, salaries unless they fire a bunch of people (which would leave them in a hole if business picks up), salaries of managers, the CEO, CFO, etc, all the lawyers who are dealing with this mess (that’s probably actually a big increase in expense), etc, etc.
I don’t follow it and don’t have an opinion as to whether it’s a good buy at present, but you’d have to figure at least a couple of quarters of VERY reduced earnings until traffic picks up again.
If there really is a 50% decrease in sales, you have to figure at least 75 to 100% decrease in profits for the quarter as they have a lot of fixed costs that don’t go down.
Thanks Saul for the input, I think this one has further to fall in any example we could think of. I’ll be watching into summer time to see if their image is starting to recover and how easy(if at all) it may be to beat the depressed comps.