Bullish Signs From Chipotle Mexican Grill (CMG)

November 19, 2013, 10:50 am ET, BY Neal- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Chipotle Mexican Grill, Inc. (NYSE:CMG) reported below consensus earnings recently mostly because of higher food costs.  On a positive note, Chipotle did show acceleration in traffic from more aggressive marketing which started in 2Q13, and new product launches such as Sofritas, but the stock is up 24% in the last month alone, and trading near all-time highs, so is CMG a buy, sell or hold at current levels?

Chipotle said it improved business during both lunch and dinner rush periods last quarter. As for catering program that launched in January, Chipotle rolled out catering to 17 more restaurants. The company plans to roll this out restaurants next month at all restaurants, aside from NYC, which will be in 2014. 

Chipotle missed quarterly EPS by $0.12 ($2.66 versus $2.78 estimate), revs rose 18.0% YOY to $826.9 million versus the $820.24 million estimate, and comps grew by +6.2% versus the 5% estimate, driven by increased traffic.  Looking ahead to 4Q13 and 2014, the company expects advertising and catering to continue to contribute to same-store sales performance. In addition, Chipotle believes that additional menu pricing, expected in mid-2014, could help boost margins higher, and that is helping the stock.  In fact, based on the CMG real-time trading report published by Stock Traders Daily, CMG has broken above long-term resistance, which is now converted support. 

Chipotle uses high quality, premium ingredients, which are expensive relative to most fast-food restaurants.  Unlike other fast-food companies, Chipotle focuses on the quality of dishes, and that focus has been bringing loyal customers back into its restaurants. In order to offset the recent spike in food costs, the company plans to increase its menu prices between 3%-5% depending on the locations in 2014.  Chipotle also plans to replace cooking oil and tortillas made with genetically modified organisms, or GMO, and wants secure supplies of antibiotic-hormone-free meats.

Chipotle uses a chain business model and does not franchise. The company has been able to report positive same store sales growth over the past few quarters, which has helped it improve its bottom line.  Chipotle's commentary during the conference call regarding strong same-store sales trends in October suggest they continue to take share from competitors. Chipotle has been taking market share from competitors like McDonald's Corporation (NYSE:MCD), Yum! Brands, Inc. (NYSE:YUM), BJ's Restaurants, Inc. (NASDAQ:BJRI) and Panera Bread Co (NASDAQ:PNRA) consistently over the past few years.

During the quarter, Chipotle opened 37 new restaurants, bringing the total restaurant count to 1,539, including its first restaurant in Germany. Food costs were 33.6% of revenue, an increase of 100 basis points driven by higher ingredient costs. Increased produce prices for tomatoes, corn and tomatillos in the salsas as well as higher costs for dairy and chicken, and finally, more expensive oils as the company began converting from GMO soy oil to non-GMO sunflower and rice bran oils drove higher ingredient costs.  

The most important development taken from the recent quarter could be the acceleration in traffic, which will be fueled further by the upcoming nationwide rollout of catering, and that additional traffic should help add even more market share gains from faltering peers.  Chipotle should benefit modestly from the closure of 64 Qdoba locations around the country as well.

Momentum stocks like CMG can make you a lot of money quickly and vise versa, which is why risk control is import.  Based on the Stock Traders Daily real-time trading report, the stock has broken above long-term resistance, which is now converted support. That is a very bullish sign, and so far, converted support is holding, and as long as that remains true, the rules that govern our strategies tell us to expect higher levels.  We are buyers of CMG at that converted support level, as long as converted support holds.  To control risk on this trade, use converted support as your stop loss, as defined in the real-time CMG trading report published by Stock Traders Daily. 

Stock Traders Daily has been providing comprehensive market analysis, and correlated trading strategies since January 2000, which was the virtual peak of the Internet Bubble.  Our objective is to provide strategies capable of making money in any market environment, and we have been doing that since inception. 

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