Another candidate for selling short-term out-of-the-money calls…
Chipotle Mexican Grill (CMG) might have experienced a renaissance in the economic recovery, we seriously question whether things have not run up too much though. Some basic numbers:
- A market cap of $8.45B, Revenues of just $1.74B but cash of $300M and virtually no debt ($3.8M)
- 31M outstanding shares of which insiders hold just 1.9%, with 2.76M shares short
- Analyst EPS expectations for this year is $6..62, rising to $8.15 next year (with the most optimistic at $8.80)
- You see a nice history of beating expectations though, the last four quarters
- So we have a nice growth stock, with revenue growth rates at 20%+ still and earnings growth a little higher
Even if we take that most optimistic EPS of $8.8, that amounts to a forward P/E of 31. That’s pretty rich already, we would say.
And there growth story is not without problems and risks
- Illegal workers. At least four analysts downgraded the stock when the company fired hundreds of them after the authorities started breathing down their neck
- Food input cost (31% of cost) are rapidly rising
- Law of large numbers, growth will slow down
- Impact of bad whether in Q1
- 2% of earnings growth was due to the company buying back stock
Add to these problems the rather overbought technical picture and we think once again selling short-term (Feb) out-of-the-money calls (like the Feb 290 ones which can be sold for 45-50 cents) will be profitable..
