Even after getting in hot water with the Feds related to alleged hiring of illegal immigrants (click here) earlier this year and being subject to the general malaise of the economy, Chipotle Mexican Grill (CMG) has continued to perform well.
Revenues for the company have increased 22.4% over last year with same-store revenues having increased by 10%.
The company’s focus on serving better tasting food with fresh ingredients while building a people culture for delighting customers appears to be working quite well.
The company continues to increase the amount of locally grown produce used in its restaurants and also recently began rolling out brown rice, much to the delight of its customers.
Additionally, new restaurants are in the works for Europe, with the first European restaurant planned for opening in Paris.
In its most recent conference call, the company indicated its profit margins are under pressure due to inflation. In response, the company has increased prices in selected markets. Chipotle's ability to successfully increase prices without negative consequences is a good sign the company has some pricing power over its competitors.
Its first Asian restaurant, ShopHouse Southeast Asian Kitchen, was recently opened in Washington, D.C., and we’ll have to wait until Chipotle’s next earnings report to find out how well the new Asian fare is performing.
With regard to hiring illegal immigrants, Chipotle allegedly hired the illegal immigrants after being provided with falsified I-9 documents by the applicants. Chipotle appears to be handling issues related to the hiring of illegal immigrants well, as it is now using the Department of Homeland Security’s online tool E-Verify to verify applicant information and is still able to attract and hire workers. I’m a little curious as to why Chipotle’s appears to have been singled out by! the Fed s for investigation related to its hiring practices, as I’m sure other large restaurants are worthy of having their hiring practices investigated.
Chipotle is in the process of repurchasing stock and is rolling out its first affinity program called Farm Team, which rewards customers for their understanding of and passion for Chipotle. The core of the program is an online world showing the full spectrum of farming. Participants can take quizzes, participate in polls, watch videos and earn badges. Initial participation in the program is limited to those invited by personnel associated with the company. Not having seen the program, I’m a little skeptical of its potential for success, but it should be a good learning experience. We’ll just have to wait until future earnings reports to see how well the affinity program performs.
Chipotle stock price is priced at a premium with a P/E ratio of 48. Investing in Chipotle at this point could also be a hazard with the weakening economy and the potential for bad news related to the hiring of illegal immigrants. Also, the company’s stock has been on quite a run this year as shown by the chart below:
With such a large increase in stock price, Chipotle’s stock is due for a correction at some point.
So what’s a potential investor in Chipotle’s to do? How can an investor take advantage of Chipotle’s potential, yet have some assurance the investor won’t get badly hurt by a plummet in the stock’s price.
Well, an investor might consider entering a collar position for Chipotle. A collar is a stock option strategy where a call option is sold against a purchased or existing stock and some of the proceeds from selling the call option are used to purchase a put option for insurance or protection in the event the price of the stock drops significantly.
Us ing our PowerOptions search tool, a collar for Chipotle was found with a potential return of 2.6% and a maximum risk of 9.4%. The time frame for realizing the potential return is 43 days. The position may be entered by selling a 2011 November 300 call option and purchasing a November 260 put option. As long as the price of CMG is greater than or equal to the entry price of $294 at options expiration in November, the position will return at least 2.6%. Additionally, if the price of CMG were greater than or equal to the strike price of the call option, $300, at expiration, the position will return 4.6%. And if the price of CMG were to drop below the strike price of the put option, the maximum loss for the position is limited to 9.4%, even if the price of CMG drops to zero.
A profit/loss graph for the collar position is shown below:
A word of warning, this collar position may not be for all investors with the price of CMG around $300, as one contract of this position will require purchasing or owning 100 shares of the company’s stock which currently would require an investment of around $30,000.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
No comments:
Post a Comment