Last fall, hedge fund manager David Einhorn laid out a bearish Chipotle case. Einhorn’s argument was that, with Taco Bell getting into higher quality food, Chipotle’s best days were behind it. But with Taco Bell finding such success with a menu item Chipotle would never dream of carrying, perhaps the two fast food joints can coexist after all.
Einhorn came out against Chipotle last October at the Value Investing Congress. The Greenlight Capital founder gave two reasons for his bearishness. First, Einhorn suggested that Chipotle was overvalued. Trading with a price-to-earnings ratio of 36, more than double that of the S&P 500’s and about twice as great as McDonald’s Corporation (NYSE: MCD), it isn’t hard to argue that Chipotle Mexican Grill, Inc. (NYSE:CMG) is overvalued from a financial standpoint.
But secondly, and perhaps more importantly, Einhorn said that Taco Bell had begun to “eat Chipotle’s lunch.” Einhorn cited Taco Bell’s new Cantina menu initiative, a collection of new offerings that were similar in quality to Chipotle’s food, but cheaper.
Taco Bell’s marketing shift away from Cantina
Taco Bell pushed the Cantina menu hard last summer — its TV ads featuring Chef Lorena Garcia were all over the air — but in 2013, the company has shifted focus back to its mega-hit Doritos Locos Tacos.
Perhaps that’s for the best. While Taco Bell has said it is “very pleased” with the results from the Cantina menu, Doritos Locos Tacos have been wildly successful. In fact, the taco reportedly led to the creation of 15,000 jobs. It was the best product launch in the company’s history, and arguably one of the best launches in the history of fast food.
In March, Taco Bell released the Cool Ranch-flavored version of the taco, and advertisements have shifted to reflect that launch.
Although Chipotle stumbled in the weeks following Einhorn’s prediction, shares have rebounded and have performed fairly well. In the last three months, shares have rallied roughly 10%. Perhaps time will show that Einhorn’s original thesis was correct. That said, he’s very likely lost money on the position to date. Greenlight’s last 13F filing revealed that the company owned about $15 million worth of Chipotle Mexican Grill, Inc. (NYSE:CMG) put options.
Taco Bell has an image problem
The question behind the trade is really one of image versus dollars. Einhorn could be right; Chipotle’s offerings could be a lesser value than Taco Bell’s Cantina items. But consumers don’t make their decisions on dollars alone.