When it comes to fast food, there is no more controversial stock than Chipotle Mexican Grill, Inc. (NYSE:CMG). Although it’s been attacked by hedge fund titans — David Einhorn and Jeff Gundlach — the company continues to reward shareholders.
Shares surged during Thursday’s after-hours session following an impressive earnings report. Should investors consider buying shares, or is it too late to get in?
Chipotle remains misunderstood
When it comes to short selling, David Einhorn is up there with the best of them. The founder of Greenlight Capital has successfully identified major short selling opportunities in the past, including Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) and Lehman Brothers.
Yet, the case he built against Chipotle Mexican Grill, Inc. (NYSE:CMG) last October seems to be constructed on a faulty premise. Specifically, Einhorn told investors he believed that Taco Bell (owned by Yum! Brands, Inc. (NYSE:YUM)) would soon “eat Chipotle’s lunch.”
Taco Bell has been working to expand its offerings and increase its quality. Its Cantina Bell menu certainly does attempt to go after the type of customers Chipotle attracts; however, as I’ve written previously, the company can’t shake its low-grade image, especially when it continues to advertise items like Doritos Locos tacos.
More recently, Jeff Gundlach jumped on the anti-Chipotle bandwagon when he told a group of conference attendees that the concept of a gourmet burrito was an “oxymoron.” Tell that to the millions of customers Chipotle serves, Jeff.
Are you buying a business model or a menu?
But, despite the fact that Chipotle Mexican Grill, Inc. (NYSE:CMG)’s core business is sound, the stock certainly does trade at a steep valuation. Prior to Thursday’s earnings, shares were trading with a price-to-earnings ratio of over 37. That’s almost double rival McDonald’s Corporation (NYSE:MCD).
That valuation makes sense only if investors buy into the notion that Chipotle represents a new business model — not just burritos.
That business model is a combination of high-quality ingredients (what the company calls food with integrity), a hip image, and unparalleled food customizability. Chipotle’s new concept restaurant, ShopHouse, attempts to apply that business model to Asian cuisine.
If it turns out customers are buying Chipotle simply because they really like the company’s burritos, then ShopHouse ought to fail, and Chipotle’s shares are likely significantly overvalued. But, if it turns out Chipotle is standing on the precipice of a new restaurant paradigm, then shares remain a bargain.
The silent fast food revolution
What is abundantly clear is that the old fast food business model is dead — or at least, companies are acting like it is.
That old business model, developed over the last 50 or so years, was built around cheap, greasy food sold at bargain prices, with little customization (“Give me a number 1!”). In its heyday, it was undeniably successful, and nearly every fast food giant one can think of used it.