Could Chipotle Give Your Portfolio a Jolt?

With shares of Chipotle Mexican Grill (NYSE:CMG) trading around $661, 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.

The stock price of Chipotle Mexican Grill, surged 10 percent to $649.40 per share during the extended hours trading after the company reported strong second-quarter financial results. According to restaurant chain operator said its earnings for the second quarter increased 24 percent to $3.50 per share and its revenue rose more than 28 percent to $1.05 billion. Its financial result beat the $3.09 in earnings per share and $989 million in revenue estimated by Wall Street analyst. During the quarter, Chipotle Mexican Grill, said its comparable restaurant sales climbed 17.3 percent primarily due to increased traffic and partly from menu price increases. The company fully implemented its menu price increases by the end of the quarter. Chipotle Mexican Grill, said food costs account 34.6 percent of its revenue, an increase of 150 basis points due to the increase in the prices for beef, avocados and dairies, but partially offset by its menu price increases and lower tomatillo prices. Its restaurant level operating margin declined 30 basis points to 27.3 percent due to higher food and marketing costs, but partially offset by favorable sales leverage in labor and occupancy costs.

Chipotle Mexican Grill, opened 45 new restaurants during the period. In a statement, Steve Ells, co-founder, chair and co-CEO of the company, said, “These extra-ordinary results are made possible by our special food culture, innovative people culture and strong business model that are not only creating shareholder value, but also helping us realize our vision to change the way people think about and eat fast food.”

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 trading near all time highs and looks poised to continue. 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 above its rising key averages which signal neutral to bullish 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

22.2%

6%

4%

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

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish 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 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

24.11%

7.76%

30.08%

17.18%

Revenue Growth (Y-O-Y)

28.55%

24.41%

20.74%

18.04%

Earnings Reaction

11.83%

-5.93%

11.74%

16.09%

Chipotle Mexican Grill has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Chipotle Mexican Grill’s recent earnings announcements.

P = Excellent 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

23.83%

-17.78%

-0.78%

-1.02%

2.06%

Chipotle Mexican Grill has been a relative performance leader, year-to-date.

Conclusion

Chipotle Mexican Grill provides consumers with quick, delicious, and healthy food options on a daily basis. The company on Tuesday reported extra-ordinary second quarter results that left investors happy. The stock has been trending much higher in the last couple of years and is currently trading near all time highs. Over the last four quarters, earnings and revenues have been on the rise. Relative to its peers and sector, Chipotle Mexican Grill has been a year-to-date performance leader. Look for Chipotle Mexican Grill to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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