Chipotle Mexican Grill

Fundamentals

Written by Ophir Gottlieb, 12-08-2015
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PREFACE
Chipotle Mexican Grill (CMG) options reflect outright panic in the stock right now.


STORY
CMG stock is down 25% in the last 3-months based on an E. coli breakout in multiple stores at multiple locations in nine states that have forced CMG management to take sales forecasts not only down, but to negative growth. The stock has fallen from a 52 week high of $758 to now $540. Here's the stock chart.



While the stock has collapsed, the option market is pricing in yet more downside risk, to the point of panic. Here's what's called a skew chart for CMG options expiring this Friday, December 11th.



Without getting overly technical, the chart shows us the volatility priced into the options for each strike price. What we note here is that the downside (the left hand side) looks like a straight line up. In English, the risk of a black swan stock drop even further than we are now is priced with a higher probability than normal. Here's how this chart looked one-month ago for the options expiring in November.

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Just note how the slope of that curve on the left hand side is so vastly smaller than the current one.

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THE END OF THE WORLD?
Let's not lose the forest for the trees here. Before this outbreak, CMG was a Wall Street darling, and here's why.

Here's a chart of revenue (TTM) through time.



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Yes, revenue was up 18% year-over-year and 49% over two-years. Revenue (TTM) had broken an all-time high for more than 30 consecutive quarters; that's more than 7 straight years. And how about earnings?

In the chart below we have simply added net income (TTM) in the orange line on top of the revenue chart.



Yep, net income is also at an all-time high and increased 31% year-over-year.

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CONCLUSION
Now of course, the company has stated very clearly that the growth trajectory in the near-term is done. The company will see slowed growth or even negative growth this quarter. But hold on now, can we perhaps just be seeing a one-time event? Has twelve years of unmistakable strength suddenly gone away? Well, it's possible. It's also possible that the panic in the market is nothing more than that.

Remember, the trend is rising revenue, operating margins, earnings and capital expenditures (to expand). The "event" is likely a blip, and panic almost never turns out to be rational. That's why it's called panic.

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