Chipotle Mexican Grill Is a Short Heading Into EarningsCMG) is scheduled to report its earnings later this month.
With the stock having recovered handsomely from its 52-week lows, I think buying Chipotle Mexican Grill into earnings does not make sense as the stock is overvalued and a moderately bad earnings report would send it crashing.
Here are the numbers to knowChipotle Mexican Grill is scheduled to report earnings on October 25 ,and according to Yahoo! Inc. (YHOO) Finance, analysts are expecting the company to post a revenue decline of 30%.
Despite the company opening several new restaurants, the revenue drop indicates that recent moves to attract new customers are not succeeding.
The stock is already trading at 61 times trailing earnings.
It will be very difficult for Chipotle Mexican Grill to justify this valuation if the sales trend continues.
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On the earnings front, the company’s EPS estimate has been consistently falling from the last two months, again indicating that the company’s turnaround plans aren’t as effective as once thought. Given that all the promotional events and advertising are dragging the company’s earnings lower and have been ineffective, Chipotle Mexican Grill’s valuation should get worse going forward.
With the stock already trading at 61 trailing earnings, another significant dip in EPS may cause investors to lose faith, severely limiting its valuation potential.
With same-store sales expected to be down over 20%, Chipotle Mexican Grill does not really offer much upside potential at these levels. The company will have to greatly outperform on earnings, which is very unlikely, for it to move higher.
The margin of safety is virtually non-existent and the risk to reward ratio is unfavorable for bulls at these levels.
Shorting the stock is your best optionI have been advising investors to short Chipotle Mexican Grill ever since it was trading over $600. Now that the stock is trading over $420, I think there is enough margin of safety to short it again, especially heading into earnings season.
As mentioned above, I expect Chipotle Mexican Grill to post another weak quarter. With its turnaround plans proving to be ineffective, it won’t be long before the market punishes the stock and drags it back to a fair valuation.
Published on Oct 7, 2016By Ayush Singh