Bill Ackman‘s Pershing Square Capital Management has recently released a third quarter investor letter, and in it, the hedge fund talks about its investment in Chipotle Mexican Grill, Inc. (NYSE:CMG). Let’s take a closer look:
In terms of its year-to-date performance, shares of the burrito chain Chipotle Mexican Grill, Inc. (NYSE:CMG) haven’t done too well, falling around 20%. The equity has also fallen from around $500 in early May as sentiment around the stock has weakened. Pershing Square acknowledges the challenges, writing that “the last six months have been challenging for Chipotle’s brand’, shareholders, and other stakeholders”.
Ackman’s fund is nevertheless bullish as it believes there is ‘significant long-term growth opportunity’. Before investing, Pershing Square knew that its investment could be volatile, and the fund is confident that ‘with the right initiatives and execution’, that Chipotle Mexican Grill, Inc. (NYSE:CMG) could undergo a successful turnaround. The fund notes that Chipotle Mexican Grill, Inc. (NYSE:CMG) management has been optimizing operations to deliver a great experience for guests, and that the company’s digital initiatives ‘continue to progress’. The company’s mobile app also underwent its first major revamp in many years, and includes features that make it easier for customers to buy from Chipotle Mexican Grill, Inc. (NYSE:CMG).
Although Chipotle Mexican Grill, Inc. (NYSE:CMG) has a strong balance sheet with substantial net cash, Pershing Square believes the stock has been volatile due to the fact that it “is highly dependent on investor’s estimates of future growth, average unit volumes, and store margins”. When the collective market estimates of those values change, the estimate of Chipotle’s intrinsic value changes a lot, which ultimately affects the chain’s stock price. Ackman’s fund nevertheless believes that ‘if the company begins to show progress on these metrics, we would expect the stock price to respond accordingly to the upside’.