6/5/2015 0 Comments
Today's strong NFP number should reassure investors that the Q2 pickup in growth is well underway. The firm job market should allow the Fed to hike rates in September and the USD to remain well supported. I like Chipotle (CMG) after this strong jobs number on a stronger consumer, limited exposure to a strengthening USD, and WTI likely to remain below $60.
After reporting Q1, Chipotle moved down from the high $600's to the low $600's. I like Chipotle's non-GMO and 68 healthy ingredient strategy and believe this differentiation allows Chipotle to maintain above average same store sales growth, margins and pricing. Chipotle only uses 68 ingredients and no artificial ingredients and has a new ad campaign coming out to emphasis this advantage. Chipotle opened 600 new restaurants in the past 3 years, 49 in Q1. Chipotle plans to open 190 - 205 new restaurants in 2015 and currently operates 1,831 restaurants. Chipotle reported comparable restaurant sales growth of 10.4% in Q1. Chipotle mentioned sales could have been 100 - 200 bps higher with better weather and a stable supply of carnitas. Chipotle expects carnitas to return to all restaurants in Q3, and estimates a 200 bps increase in sales. Restaurant levels margins increased 160 bps in Q1. Chipotle raised prices by 6.1% last year, and this benefit to comparable restaurant sales will roll off in the coming quarters. One of the main reasons the stock was hit after reporting Q1 was the guidance of low single digit comp growth in Q2. Unfortunately, this quality operator does not come cheap. CMG is currently trading at 33x forward free cash flow and 30x forward earnings. Although the stock is richly valued, 21% long-term growth in earnings makes the stock much more attractive. Given a strengthening consumer and limited exposure to a stronger USD, Chipotle is positioned to have a strong Q2. Chipotle is attractive after guiding down and reducing expectations. The lower bar and a price increase by Q3 should propel the stock higher.
Michael Grove, CFA