Embed Size (px)
Citation preview
HEDGEYE 1
HYPOCRISY THEORY GAINING MOMENTUM
BEST IDEA: SHORT CHIPOTLE (CMG)
November 17, 2015
HOWARD PENNEY SHAYNE LAIDLAW
Data Source: Company Filings.
HEDGEYE 2
DISCLAIMER Hedgeye Risk Management is a registered investment advisor, registered with the State of Connecticut. Hedgeye Risk Management is not a broker dealer and does not provide investment advice for individuals. This research does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information. The opinions and conclusions contained in this report are those of Hedgeye Risk Management, and are intended solely for the use of Hedgeye Risk Management’s clients and subscribers. In reaching these opinions and conclusions, Hedgeye Risk Management and its employees have relied upon research conducted by Hedgeye Risk Management’s employees, which is based upon sources considered credible and reliable within the industry. Hedgeye Risk Management is not responsible for the validity or authenticity of the information upon which it has relied.
TERMS OF USE This report is intended solely for the use of its recipient. Re-distribution or republication of this report and its contents are prohibited. For more details please refer to the appropriate sections of the Hedgeye Services Agreement and the Terms of Use at www.hedgeye.com
DISCLAIMER
“Business success contains the seeds of its own destruction.” -Andrew S. Grove, Only the Paranoid Survive
HEDGEYE 5
KEY POINTS
GROWING PAINS Many fast growing restaurants hit a unit growth wall. In which they have to take a step back, slow growth, close stores and reassess their strategy. That time is near for Chipotle, as lease costs have been rising and quality real estate is getting harder to find. This fact is evident by the four foodborne illness outbreaks that CMG has had in the past year, their supply chain can’t keep up with their unit growth.
CHIPOTLE’S WHOLE FOODS MOMENT Just as Whole Foods’ (WFM) pricing scandal resulted in lost consumer trust and loyalty, Chipotle (CMG) is doing with food quality. The idea that their food is drastically different than all other fast food is a hoax created by a great marketing campaign. The animals that they get their meats from are fed GMO feed, meaning that their burritos are not actually entirely non-GMO.
SENTIMENT & VALUATION Their valuation reached record levels earlier this year, but has come down considerably. We believe it is possible to see the multiple compress to below that of McDonald’s, possibly as low as 11.0x EV / NTM EBITDA.
1
2
3
GROWING PAINS
HEDGEYE 7
CAPEX HAS HIT A PEAK
DATA SOURCE: COMPANY FILINGS, FACTSET, HEDGEYE.
-22.9%
-3.4%
33.5%
30.4%
1.5%
26.3%
3.7% 3.4%
-30%
-20%
-10%
0%
10%
20%
30%
40%
$0
$50
$100
$150
$200
$250
$300
2008 2009 2010 2011 2012 2013 2014 2015E 2016E
Yo
Y G
row
th %
$’s
in
Millio
ns
Capital Expenditures YoY Growth
CAPEX has grown 131% since 2010
HEDGEYE 8
SUPPLY CHAIN ISSUES
DATA SOURCE: COMPANY FILINGS, HEDGEYE.
CMGs Relentless Attack on the Competition They Have Their Own Problems
• Chipotle has been on a rampage since it has been a public company, bashing the food industry for its lack of food quality
But Chipotle is just like any other restaurant
― CMG has had four foodborne illness outbreaks at its restaurants in the last year
― To our knowledge there has never been another chain restaurant that has had four foodborne illness outbreaks in one year, typically it is limited to one or two and then they figure it out
― It is evident that CMG is pushing their supply chain over the edge, causing suppliers to push their limits and possibly make mistakes along the way
― At CMGs current growth they need local supply of ingredients fast, most likely leading them to sidestep testing and qualification of suppliers
CHIPOTLE’S WHOLE FOODS MOMENT
HEDGEYE 10
LAWSUITS AGAINST CMG
DATA SOURCE: TRUTHINADVERTISING.ORG, HEDGEYE.
Gallagher et al v. Chipotle Mexican Grill, Inc., Case No. 15-cv-3952, N. D. CA. ― August 2015
Reilly et al v. Chipotle Mexican Grill, Inc., Case No. 15-cv-23425, S. D. FL. ― September 2015
THERE HAVE BEEN TWO CLASS ACTION LAWSUITS FILED AGAINST CMG REGARDING ITS NON-GMO CLAIMS
• “In April 2015, Chipotle took the unprecedented step among fast-food restaurants by launching a multi-media publicity campaign touting that it was the “first national company” in the food industry to serve a menu devoid of GMOs.”
• “But as Chipotle told consumers it was “G-M-Over it,” the opposite was true. In fact, Chipotle’s menu has never been at any time free of GMOs. Among other things, Chipotle serves meat products that come from animals which feed on GMOs, including corn and soy.”
• “Chipotle’s tacos and burritos are also usually served with sour cream and cheese from dairy farms that feed animals with GMOs. And, Chipotle also sells Coca-Cola and other soft drinks that are made with corn-syrup—a GMO.”
• “While Chipotle knows that its menu contains ingredients with GMO,s, it takes no meaningful steps to clarify consumer misconceptions in its advertisements and on its billboards, both in stores and in print, which instead say “all” of the ingredients used in its Food Products are “non-GMO”
• “During the Class Period, Chipotle engaged in a uniform campaign through which it purposefully misrepresented and continues to purposefully misrepresent to consumers that its food products contain only non-GMO ingredients.”
• “However, Chipotle’s meat products come from animals that feed on GMOs, including corn and soy. Additionally, Chipotle serves its meals with sour cream and cheese that come from dairy farms that feed the animals GMOs.”
• “Chipotle’s actions constitute violations of Florida’s Deceptive and Unfair Trade Practices Act (“FDUTPA”),”
It is clear that that these complaints are not going away any time soon, CMG may have broken the trust of its consumers. As we have seen with companies such as WFM, trust is built over years and can be shattered in a single moment causing lasting negative effects for the brand.
HEDGEYE 11
CONFLICTING BELIEFS ON WHAT IS NON-GMO
DATA SOURCE: COMPANY FILINGS, HEDGEYE.
CMG 2014 10-K: “Further, we disclose on our website which ingredients contain genetically modified organisms, or GMOs, and we are working to replace ingredients containing GMOs in our food (not including beverages) with non-GMO ingredients. While the meat and poultry we serve is not genetically modified, the animals are likely fed a diet containing GMOs. Because of the prevalence of GMO’s in a number of important feed crops, most grains used as animal feed in the U.S. are genetically modified.”
The Produce is non-GMO
But the cattle is still fed GMO feed
• CMG’s claims that there are no GMOs in its food is well within the written law
• But the animals are still fed a diet that is predominately based of ingredients that have GMOs, such as corn and soy, this dynamic is a loophole within the law
HEDGEYE 12
MISLEADING ADVERTISEMENTS
DATA SOURCE: COMPANY FILINGS, HEDGEYE.
Bashing the competition Misleading Advertisements
HEDGEYE 13
NON-GMO PROJECT VERIFICATION
Widely touted as the gold standard for non-GMO verification, the Non-GMO Project has yet to solidify its verified restaurant process
DATA SOURCE: NON-GMO PROJECT.
HEDGEYE 14
THE NON-GMO LOOPHOLE
DATA SOURCE: HEDGEYE.
• The United States has food labeling laws but does not have labeling requirements for animal feed, or for animal products produced from animals fed GMO crops. This loophole, where the GMO label is not applied to food products made from animals raised on GMOs, is responsible for a large amount of unnoticed GMO consumption. This loophole and other laws that allow GMOs to be a hidden part of the food system, mean that products like meat, eggs, and milk that were produced by animals consuming GMOs are able to enter the marketplace free of any GMO labeling.
• The United States of course, infamous for the pervasiveness of GMOs and the country’s lack
of labeling laws, does not have to deal with the particular complexities of GMO animal feed labeling. In the United States, in order to avoid animal products that have not been influenced by GMO animal feed, consumers have to look for certified organic products (since organic standards prohibit the intentional use of GMOs) and for the recently released Non-GMO Project certification for meat, egg, and dairy products.
HEDGEYE 15
THE NON-GMO LOOPHOLE (CONT’D) SAFE AND ACCURATE FOOD LABELING ACT (HR 1599)
Definition ‘covered product’: an agricultural product, whether raw or processed (including any product derived from livestock that is marketed in the United States for consumption by humans or other animals; any other food not derived from an agricultural product; seed or other propagative material.
― “(2) in the case of a covered product derived from livestock that is marketed in the United States for human consumption, the covered product and the livestock, products consumed by such livestock, and products used in processing the products consumed by such livestock shall be produced without the use of products derived from genetic engineering; and
― “(3) labeling or advertising material on, or in conjunction with, such covered product shall not suggest either expressly or by implication that covered products developed without the use of genetic engineering are safer or of higher quality than covered products produced from, containing, or consisting of a genetically engineered plant.
― “(d) TREATMENT OF LIVESTOCK.—In the case of a covered product derived from livestock that is marketed in the United States for human consumption, the covered product shall not be considered to be genetically engineered solely because the livestock consumed feed produced from containing, or consisting of a genetically engineered plant.
― (c) RULE OF CONSTRUCTION.—For the sole purpose of subsection (b)(1), a covered product derived from livestock that consumed genetically engineered plants shall be deemed as having been produced from, containing, or consisting of a genetically engineered plant.
DATA SOURCE: CONGRESS.GOV.
SALES AND TRAFFIC TRENDS
HEDGEYE 17
CMG SAME-STORE SALES 1Q10-3Q16E THE STREET IS MODELING THE START OF A NEW THREE YEAR CYCLE
DATA SOURCE: COMPANY FILINGS, CONSENSUS METRIX, HEDGEYE.
4.3%
8.7%
11.4%
12.6% 12.4%
10.0%
11.3% 11.1%
12.6%
8.0%
4.8% 3.8%
1.0%
5.5% 6.2%
9.3%
13.4%
17.3%
19.8%
16.1%
10.4%
4.3%
2.6% 2.3%
3.5% 4.5% 4.1%
-1.0% -0.5% -0.5%
0.0%
-5%
0%
5%
10%
15%
20%
Company Owned SSS Consensus Est. Hedgeye Est.
Two-Year Avg. Consensus Est. two-year avg Hedgeye Est. two-year avg.
HEDGEYE 18
CMG TRAFFIC TRENDS 1Q09-3Q15
DATA SOURCE: COMPANY FILINGS, CONSENSUS METRIX, HEDGEYE.
-4.8%
-3.5%
-2.5%
0.6%
4.0%
8.6%
10.0%
11.2% 10.7%
7.5%
6.7%
5.9%
7.5%
3.4%
4.2% 3.5%
0.7%
5.5% 6.2%
8.3%
13.4%
12.3%
11.3%
7.8%
3.6%
-0.3%
1.9%
-5%
-3%
-1%
1%
3%
5%
7%
9%
11%
13%
15%
Traffic Change Two-Year Avg.
March 2013: CMG commits to
removing GMOs from its food
April 2015: CMG began advertising
that it would be serving food free of
GMOs
HEDGEYE 19
CMG PRICE INCREASES 1Q09-3Q15
DATA SOURCE: COMPANY FILINGS, CONSENSUS METRIX, HEDGEYE.
IF CMG IS ON A THREE YEAR CYCLE THEY DO NOT HAVE PRICING POWER FOR THE NEXT YEAR OR TWO
8.5%
6.7%
6.0%
2.4%
0.0% 0.1% 0.4% 0.4%
0.7%
1.5%
4.6% 4.9% 4.9%
4.6%
0.6% 0.3%
0.7%
0.0% 0.0% 0.0% 0.0%
2.5%
6.3% 6.3% 6.1%
4.0%
0.7%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Price Change Two-Year Avg.
SENTIMENT AND VALUATION
HEDGEYE 21
ANALYST SENTIMENT
DATA SOURCE: FACTSET, HEDGEYE.
48% 48% 48% 48% 48% 52%
63% 62% 62% 56% 56% 54% 54% 55% 55% 54% 55% 57% 58% 60% 60% 60% 59% 58%
53%
48% 48% 48% 48% 48% 44%
37% 38% 38% 44% 44% 46% 46% 45% 45%
43% 41% 40% 42% 40% 40% 40% 41% 42%
47%
4% 4% 4% 4% 4% 4% 0% 0% 0% 0% 0% 0% 0% 0% 0% 4% 3% 3% 0% 0% 0% 0% 0% 0% 0%
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Buy+Overweight Hold Sell+Underweight Target Price Actual Price
HEDGEYE 22
SHORT INTEREST
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
DATA SOURCE: FACTSET, HEDGEYE.
HEDGEYE 23
EARNINGS REVISIONS
DATA SOURCE: FACTSET, HEDGEYE.
$17.00
$17.10
$17.20
$17.30
$17.40
$17.50
$17.60
$550
$600
$650
$700
$750
$800
11/13/2014 2/13/2015 5/13/2015 8/13/2015 11/13/2015
EP
S E
stim
ate
Sh
are
Pri
ce
1-year EPS Revisions vs. Stock Price
Stock Price (Local) EPS Consensus Estimate
HEDGEYE 24
VALUATION
NTM EV/EBITDA Multiple11.0x 11.4x 11.8x 12.2x 12.6x 13.0x 13.3x 13.6x 13.9x 14.2x 14.5x
$1,016 $389.20 $402.23 $415.26 $428.30 $441.33 $454.36 $464.14 $473.92 $483.69 $493.47 $503.24$1,037 $396.37 $409.66 $422.95 $436.25 $449.54 $462.84 $472.81 $482.78 $492.75 $502.72 $512.69$1,057 $403.68 $417.24 $430.80 $444.36 $457.92 $471.48 $481.65 $491.82 $501.99 $512.16 $522.33$1,078 $411.14 $424.97 $438.80 $452.63 $466.46 $480.29 $490.67 $501.04 $511.41 $521.79 $532.16$1,100 $418.74 $432.85 $446.96 $461.07 $475.17 $489.28 $499.86 $510.44 $521.03 $531.61 $542.19$1,122 $426.50 $440.89 $455.28 $469.67 $484.06 $498.45 $509.25 $520.04 $530.83 $541.62 $552.42$1,144 $434.42 $449.09 $463.77 $478.45 $493.13 $507.81 $518.81 $529.82 $540.83 $551.84 $562.85$1,167 $442.49 $457.46 $472.43 $487.40 $502.38 $517.35 $528.58 $539.80 $551.03 $562.26 $573.49$1,191 $450.72 $465.99 $481.27 $496.54 $511.81 $527.08 $538.53 $549.98 $561.44 $572.89 $584.34
BEAR BASE BULL
-34% -17% -1%
EB
ITD
A
DATA SOURCE: HEDGEYE.
HEDGEYE 25
HEDGEYE RESTAURANTS BEST IDEAS LIST
DATA SOURCE: HEDGEYE.
LONG LIST TRADE TREND TAIL SHORT LIST TRADE TREND TAIL
MCD McDonald's - - CMG Chipotle Mexican Grill X X XPNRA Panera Bread Company - BOJA Bojangles' X X XZOES Zoe's Kitchen - SHAK Shake Shack - X XYUM Yum! Brands - WEN Wendy's - X XDFRG Del Frisco's Rest. Group - JACK Jack In The Box - X X
DRI Darden Restaurants - X X
LONG BENCH SHORT BENCH
PLKI Popeyes Louisiana Kitchen SONC SonicHABT Habit Restaurants BWLD Buffalo Wild Wings RUTH Ruth's Chris Steak House CHUY Chuy's Holdings TXRH Texas Roadhouse QSR Restaurant Brands Int.
DNKN Dunkin' BrandsBLMN Bloomin' Brands
Bench = timing is not right, or research is in progress.
