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Here’s Why Ensemble Capital Likes Chipotle Mexican Grill (CMG) Stock

Ensemble Capital, an independently-owned investment firm, recently published its first-quarter Ensemble Fund commentary – a copy of which can be downloaded here. During the first quarter of 2020, the Ensemble Fund returned -18.6%, while the benchmark S&P 500 was down 19.6%.

In the said letter, Ensemble Capital highlighted a few stocks and Chipotle Mexican Grill Inc (NYSE:CMG) is one of them. Chipotle Mexican Grill owns and operates quick serve Mexican restaurants. Year-to-date, CMG stock gained 4.5% and on May 4th it had a closing price of $875.00. Its market cap is of $24.43 billion. Here is what Ensemble Capital said:

“Chipotle Mexican Grill, Inc. (2.4% weight in portfolio): Competitive moats are not common in restaurants. Margins are typically low, and customers are fickle. But if you drive down Main Street America, you’ll find that most of the national chains you grew up with are still around. One thing we’ve come to appreciate is how difficult it is for a restaurant concept to emerge from local or regional prominence and onto the national stage. But with that national scale comes myriad benefits including spreading advertising dollars over a wider base of stores and bargaining power with suppliers and delivery aggregators.

It’s particularly difficult to scale freshly prepared food with no freezers, preservatives, or microwaves. This is one reason why we believe Chipotle is an exceptional business and started building a position in the first quarter. Indeed, it was in trying to scale freshly prepared, quickly served foods that Chipotle experienced the major risk of the process, namely foodborne illness. It’s hard to overstate the impact of the negative headlines that followed in 2015 and 2016. That event would have destroyed most restaurants, but not Chipotle. The company improved food handling processes and aggressively sought to win back customer trust and was successful.

Operating company-owned restaurants (as opposed to franchises) allows Chipotle to adjust quickly to changes in the market. We were impressed, for example, by how quickly the company mothballed its planned Queso Blanco marketing plan to offer free delivery during March and April to reach customers staying home. To that point, Chipotle’s delivery and mobile order capabilities are exceptional because most of its locations have second lines to prepare mobile orders without complicating the in-store order process. In addition, about two of every three Chipotle orders are bowls, which travel better than most other quick-serve foods. Suffice it to say, that Chipotle is well positioned to capitalize on delivery and mobile order trends. Before COVID, we believed Chipotle customers would slowly shift toward more digital orders and pickups – Chipotle’s highest margin order type – and delivery. Post-COVID, we believe this trend will accelerate now that more customers became used to mobile ordering during their time in quarantine.

The coming months will undoubtedly be challenging for Chipotle. Fortunately, Chipotle has a solid balance sheet with no debt. Indeed, while Chipotle qualified for government assistance through the Paycheck Protection Program, it turned down the offer. Because of Chipotle’s financial strength, we think COVID-related commercial real estate turmoil will allow Chipotle to accelerate its store buildout into excellent locations at attractive lease terms.”

In Q4 2019, the number of bullish hedge fund positions on CMG stock increased by about 12% from the previous quarter (see the chart here).

Disclosure: None. This article is originally published at Insider Monkey.

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