On October 7, a caller asked whether Chipotle Mexican Grill, Inc. (NYSE:CMG) would reach lower lows before recovering. Mad Money host Jim Cramer replied:
You know what? CMG, I still think Scott Boatwright’s getting it right. But you know what? The restaurant group is going just so out of favor, it’s incredible. Now, some of that is because of gasoline and inflation; some of that is because of the belief that anything that costs more than $15 for dinner is too expensive in this country. And it’s not just Chipotle that’s being hit by that. Me? I think this too shall pass, but I know… I’m probably one of the few people who thinks that $30 is a good level to buy CMG.
Even in the last week of September, Cramer highlighted his “hold” level of the stock.
Chipotle (CMG) ranks second on our list of 11 Best Restaurant Stocks to Buy Right Now. But which restaurant stock attracted even greater hedge fund interest and claimed the top spot?
Transactions Have Returned to Growth
Chipotle Mexican Grill, Inc. reported second-quarter revenue of approximately $3.3 billion, up 9.3%. Comparable restaurant sales increased 2.2%, including a 1% increase in transactions and a 1.2% rise in average check. The company opened 100 company-owned restaurants, including 80 with Chipotlanes, plus one international partner-operated location. Management raised its full-year comparable-sales outlook to low-single-digit growth and maintained plans for 350 – 370 restaurant openings.
A separate development followed his comments. On October 8, Chipotle shares rose approximately 6% after a report that Starbucks had explored a takeover. Starbucks declined to comment on speculation and emphasized its own turnaround. No acquisition agreement was announced, so the report should not be treated as an established part of Chipotle’s investment case.
Higher Sales Have Not Produced Higher Profits
Chipotle’s recovery remains uneven. Food, beverage, and packaging costs increased to 29.7% of revenue from 28.9%, highlighting beef and freight inflation and higher ingredient usage. Labor costs rose to 25% from 24.7%. Quarterly net income declined to $403.5 million from $436.1 million. Adjusted diluted EPS remained unchanged at $0.33 despite the revenue increase. Traffic is improving, but higher costs are absorbing part of that progress.
Chipotle Mexican Grill, Inc. trades at approximately 25.8x forward earnings, compared with 17.9x for McDonald’s and 22.4x for Yum! Brands. The comparisons are imperfect because Chipotle operates its restaurants while those peers rely heavily on franchising. Nevertheless, Chipotle still carries a premium, leaving investors dependent on renewed earnings growth. You can also see how Chipotle compares to another one of its competitors.
Institutional Ownership Edged Lower
The number of hedge funds holding Chipotle Mexican Grill, Inc. fell to 63 in Q2 from 68 in Q1, according to Insider Monkey. With 24.24 million shares, Arrowstreet Capital was the most prominent hedge fund holder of the stock. Short interest represented 3.60% of the public float. That combination shows a modest decline in participation rather than an unusually large short position.
Cramer is willing to look through the restaurant sector’s weakness, possibly because customers are returning and Chipotle continues opening locations. The missing piece is stronger profit growth. A sustained recovery will depend on keeping those customers while bringing sales growth through to earnings.
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