Should You Consider Chipotle?

With shares of Chipotle Mexican Grill (NYSE:CMG) trading around $523, is CMG an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Chipotle Mexican Grill operates restaurants throughout the United States, as well as two restaurants in Toronto and two in London. The company’s restaurants serve a menu of burritos, tacos, burrito bowls, and salads. Chipotle Mexican Grill manages its operations and restaurants based on six regions that all report into a single segment. It prides itself on serving the best possible ingredients during a time when consumers are more keen to this detail.

Recently, Chipotle Mexican Grill announced its first-quarter earnings numbers. While revenues climbed by 24 percent, profits rose by just 8 percent. There were a couple reasons for the disparity, but a big one was price inflation. The company’s costs rose and it didn’t pass these increases on to customers. As a result, the company’s stock weakened. In response, the company announced that it was going to raise its prices. Will it work, and will it help boost the company’s languishing stock? Raising prices is generally a mixed bag for any retailer or fast-food service provider. On the one hand, the bulk of the price increase goes directly to the bottom line. This can counter the negative effect of rising commodity prices. On the other hand, raising prices alienates consumers. They may be used to paying a certain price and then decide to shop someplace else when they see the price increase. A company in Chipotle’s situation has to evaluate both sides of this coin in making such a decision.

T = Technicals on the Stock Chart are Strong

Chipotle Mexican Grill stock has been trending much higher in the last couple of years. The stock is currently surging higher and looks set to continue this path. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Chipotle Mexican Grill is trading between its rising key averages which signal neutral price action in the near-term.

CMG

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Chipotle Mexican Grill options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Chipotle Mexican Grill options

24.75%

16%

14%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Average

Average

July Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Chipotle Mexican Grill’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Chipotle Mexican Grill look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

7.76%

30.08%

17.18%

10.16%

Revenue Growth (Y-O-Y)

24.41%

20.74%

18.04%

18.22%

Earnings Reaction

-5.93%

11.74%

16.09%

8.55%

Chipotle Mexican Grill has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Chipotle Mexican Grill’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Chipotle Mexican Grill stock done relative to its peers, Panera Bread (NASDAQ:PNRA), McDonald’s (NYSE:MCD), Yum Brands (NYSE:YUM), and sector?

Chipotle Mexican Grill

Panera Bread

McDonald’s

Yum Brands

Sector

Year-to-Date Return

-1.81%

-12.00%

5.51%

-0.97%

-1.31%

Chipotle Mexican Grill has been an average performer, year-to-date.

Conclusion

Chipotle Mexican Grill provides consumers with quick, delicious, and healthy food options on a daily basis. The company announced that it was going to raise its prices. The stock has been trending much higher in the last couple of years and looks set to continue this path. Over the last four quarters, earnings and revenues have been on the rise. However, investors have had mixed feelings about recent earnings announcements. Relative to its peers and sector, Chipotle Mexican Grill has been an average year-to-date performer. Look for Chipotle Mexican Grill to OUTPERFORM.

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