Chipotle Mexican Grill Inc. (CMG): Inside Ackman’s Turnaround Plans for the “Least Optimized” QSR

Bill Ackman‘s Pershing Square has a massive investment in Chipotle Mexican Grill, Inc. (NYSE:CMG), valued at $1.2 billion at the end of June. It also has massive ideas that it believes could rejuvenate the struggling fast-food chain. In a wide-ranging and lengthy interview on CNBC today, Ackman discussed a variety of issues, including his ongoing activist campaign against Automatic Data Processing (NASDAQ:ADP), as well as his investment in Chipotle.

The latter has turned into yet another sore spot for the billionaire investor, who first took a stake in the company in the second-half of 2016 after it had fallen well off of its highs of a year earlier. However, shares have continued to slide since Ackman’s investment, losing 25% in the past year and recently hit their lowest point since 2013 following a third-quarter earnings miss announced on October 24. That performance has dragged Pershing Square down to a loss of 3.3% year-to-date through the end of October.

Ackman isn’t panicking when it comes to his Chipotle Mexican Grill, Inc. (NYSE:CMG) investment however, believing that shares are now seriously undervalued, at least based on projections of the company’s earnings.

“The right way to look at it in our view is not just to put a multiple on next year’s (earnings)”, but rather on “what will the earnings be two years out? Four years out? … And then discount those earnings back in time. On that basis it’s a very cheap stock if they can perform,” he told CNBC.

While Ackman said that the company still has work to do to recover from the food safety scandal that has dogged it since late-2015, he also referenced the fact that other companies have all successfully recovered from such scandals. More importantly, Ackman also believes there are plenty of opportunities for the company to optimize its performance. Among his suggestions are the need for drive-thrus, longer store hours, breakfast offerings, and overseas expansion.

Ackman announced his displeasure with the company’s third-quarter results shortly after they were released, telling Reuters that “there is not a member of the board of directors; there is not a member of management; there is not a shareholder of the company who isn’t disappointed with the progress of the company so far.” Pershing Square currently has two seats on the company’s board of directors.

While Chipotle’s profit more than doubled in the third-quarter compared to the year-ago period, it nonetheless missed the company’s own expectations, as well as those of analysts. In addition to higher beef and avocado prices, Chipotle’s profit was hampered due to costs relating to the malware attack it suffered back in April. Furthermore, Chipotle announced that it would open 15 fewer stores in the fourth-quarter than it had originally planned.

Disclosure: None