Sorry, Einhorn -- Taco Bell Is No Chipotle
Oct 3rd 2012 9:56AM
Updated Oct 3rd 2012 10:02AM
There may be an argument to be made in calling Chipotle Mexican Grill (NYSE: CMG ) overvalued, but please don't compare the cult fave burrito roller to Taco Bell.
Shares of Chipotle slipped 4% yesterday after hedge fund manager David Einhorn singled out the fast casual darling as an ideal short candidate.
It's easy to see why a stock would move on Einhorn's diss. His target during last year's Value Investing Conference was Green Mountain Coffee Roasters (Nasdaq: GMCR ) , and the Keurig company has gone on to shed 74% of its value.
However, unlike his bearish thesis for Green Mountain, which featured a 110-slide presentation knocking everything from the company's accounting to its prospects, his shot at Chipotle is a more traditional slam on the basis of overvaluation and looming competition.
Taking a chip off the old Chipotle
Is Chipotle richly priced? Hey, the stock isn't cheap. It trades at a dear 28 times next year's projected profitability. Growth has slowed in recent years as expansion -- on a percentage basis -- has eased.
There is certainly potential for its young ShopHouse concept. Chipotle's just starting to scratch the surface in terms of international expansion. It also bears pointing out that Chipotle's comps have always been positive, and that's something that should get even better as the economy bounces back. Despite these tempting catalysts, Einhorn isn't going to get laughed at for arguing that Chipotle may be overpriced.
However, why bring up Yum! Brands' (NYSE: YUM ) Taco Bell?
That's a credibility killer right there.
Yes, Taco Bell scored a hit when it turned to spinoff sibling PepsiCo's (NYSE: PEP ) Frito-Lay to introduce Doritos Locos tacos earlier this year. Taco Bell has sold more than 200 million of the tacos with Doritos-flavored hard shells. More recently, Taco Bell turned to reality-show chef Lorena Garcia to introduce a line of Cantina Bell bowl items in July.
The menu additions have helped. Taco Bell's comps soared 13% in the company's latest quarter (which closed after it sold 100 million of its Doritos Locos, but before the Cantina Bell rollout). However, this is also coming off a 5% decline in same-store sales a year earlier. A bounce was expected. We'll get a clearer indication on how Cantina Bell is doing when Yum! Brands reports later this month.
Yes, Taco Bell is drawing more customers. But how do we know that they're Chipotle customers? How do we know they're not just folks trading burgers or fried chicken for tacos sprinkled with nacho cheese dust?
Caring for carnitas
We know that Chipotle isn't smarting for customers. The chain's comps during those same three months rose 8%, but that's also stacked on top of a 10% pop during last year's second quarter. Work the math and Chipotle's comps have actually risen 19% over the past two years (yes, that's what happens when you grow 8% on top of 10%). Despite the second-quarter success of Doritos Locos, Taco Bell restaurants in the U.S. have only posted a 7% increase in comps over the past two years.
I've enjoyed the Doritos Locos and Cantina Bell items, but they're not going to turn Taco Bell into a cult fave on the level of In-N-Out or Chipotle. The longest line I've ever seen at a Taco Bell is shorter than the shortest queue that I have seen at a Chipotle. I'm betting that you're probably nodding along in agreement with that observation.
I hate to boil things down to the anecdotal, but I went to a Chipotle over the weekend, and there were 23 people in line when I got there. A Taco Bell that is roughly 50 yards away was deserted. If Taco Bell succeeds, it won't make the Chipotle line any shorter. It'll just mean more pain for the thrifty fast-food chains.
It's hard to say that Einhorn doesn't get it, largely because he usually does get it. However, I don't think that the billionaire hedge fund manager has ever found himself fumbling for change at a Taco Bell counter, seeing if he has enough to add a chalupa to his Enchirito order. I don't know if he's taken the time to analyze the advantages of Chipotle's lightning-quick assembly line. I don't know if he's studied larger trends to prove that success at one restaurant comes at the expense of another chain.
There are too many options -- including just eating at home -- to point to new menu items at a chain that has never held Chipotle back as a concept killer.
The next time you're in Miami, Einhorn, hit me up. We'll head out to the Taco Bell and Chipotle that are at opposite ends of a tiny strip mall on U.S. 1. You'll see why Chipotle doesn't have to worry about Taco Bell.
Save room for dessert
Yes, Green Mountain Coffee Roasters was dissed by Einhorn, but with the stock as cheap as it's ever been, many investors are wondering whether this is the end of the former market darling or the perfect entry point for an enormous rebound. You can find our recommendation for how to play the stock in our new premium research report on Green Mountain. In it you'll find everything you need to know about the company, including whether it's a buy at today's prices. Click here for your copy today.