Will Recent News Hurt Chipotle Mexican Grill Stock?

With shares of Chipotle Mexican Grill (NYSE:CMG) trading around $579, 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.

Chipotle stirred up the media and guacamole lovers with news that it could “suspend” guacamole from its menu due to global warming. But a restaurant spokesperson tells the Los Angeles Times that, “This is way overblown.” The annual report from the restaurant chain warned “increasing weather volatility or other long-term changes in global weather patterns, including any changes associated with global climate change, could have a significant impact on the price or availability of some of our ingredients. In the event of cost increases with respect to one or more of our raw ingredients, we may choose to temporarily suspend serving menu items, such as guacamole or one or more of our salsas, rather than paying the increased cost for the ingredients.”

Chipotle’s Chris Arnold told the Los Angeles Times on Wednesday morning that the disclosure was routine. “As a public company … we are required to disclose any potential issues that could have potential impact on our business, and we do that very thoroughly.” So far, Chipotle is handling weather-related problems with ingredients just fine.

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 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 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

32.82%

73%

70%

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

Put IV Skew

Call IV Skew

April Options

Flat

Average

May 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 very significant 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?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

30.08%

17.18%

10.16%

24.37%

Revenue Growth (Y-O-Y)

20.74%

18.04%

18.22%

13.45%

Earnings Reaction

11.74%

16.09%

8.55%

11.53%

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

8.89%

2.37%

-1.91%

-1.20%

3.03%

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 stirred up the media and guacamole lovers with news that it could “suspend” guacamole from its menu due to global warming. The stock has been exploding higher and is currently trading near all time highs. Over the last four quarters, earnings and revenues have been on the rise which has led to pleased investors. Relative to its peers and sector, Chipotle Mexican Grill has been a year-to-date performance leader. Look for Chipotle Mexican Grill to continue to OUTPERFORM.

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