After trimming Pershing Square’s stake in Chipotle Mexican Group Inc. CMG earlier this month, activist investor Bill Ackman (Trades, Portfolio) revealed on Thursday he slimmed it down by an additional 23.04%.
According to Real-Time Picks, a Premium feature of GuruFocus, Ackman’s New York-based hedge fund, which is known for taking large positions in underperforming companies and pushing for change in order to unlock value for shareholders, sold 347,700 shares of the fast-casual restaurant chain, which was its largest and best-performing holding in 2019, on Feb. 24. It now holds 1.16 million shares, representing 16.46% of the firm’s equity portfolio and 4.18% of the company’s outstanding shares. The stock traded for an average price of $881.16 per share.
GuruFocus estimates Pershing Square has gained 75.5% on the investment since establishing it in the third quarter of 2016.
Chipotle valuation and financials
Headquartered in Newport Beach, California, the popular restaurant chain, which serves a variety of tacos and Mission-style burritos, has a $23.53 billion market cap; its shares were trading around $847.29 on Thursday with a price-earnings ratio of 68.5, a price-book ratio of 13.97 and a price-sales ratio of 4.29.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced despite the price-earnings ratio being near a one-year low. With the share price as well as the price-sales and price-book ratios being near multiyear highs, the GuruFocus valuation rank of 2 out of 10 also supports this assessment.
On Feb. 4, Chipotle reported its financial results for fourth-quarter and full-year 2019. For the quarter, the company posted adjusted earnings of $2.86 per share, topping Refinitiv’s estimates of $2.75. Revenue grew 17.6% from the prior-year quarter to $1.4 billion, which was in line with expectations. Same-store sales also increased an astounding 13.4%, well ahead of projections of a 9.5% gain.
For the full year, the burrito chain saw revenue grow 14.8% to $5.6 billion, while same-store sales increased 11.1%. Adjusted earnings came in at $14.05 per share.
Chipotle attributed its strong performance to the addition of carne asada to its menu, which was available for a limited time, as well as to an increase in digital orders and higher spending by customers.
In Pershing Square’s annual investor update presentation, Ackman acknowledged that 2019 was “an outstanding year” for Chipotle shareholders as management successfully “reignited” sales and profit growth. He noted management also has a clear plan for expansion in 2020, which includes introducing new menu items and the addition of drive-thru lanes.
Despite the progress made, Ackman cautioned that Pershing still believes “Chipotle has significant unrealized growth potential, with average restaurant sales still 12% below peak levels and margins approximately 700 basis points below peak levels.”
Chipotle’s financial strength was rated 5 out of 10 by GuruFocus on the back of debt ratios that underperform over half of its competitors. The high Altman Z-Score of 6.41, however, indicates the company is in good standing financially.
Despite having declining margins, the company’s profitability scored an 8 out of 10 rating. Chipotle is also supported by strong returns that outperform a majority of industry peers, a moderate Piotroski F-Score of 6, which implies operations are stable, and a business predictability rank of one out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 1.1% per annum over a 10-year period.
Of the gurus invested in Chipotle as of the quarter ended Dec. 31, Jim Simons (Trades, Portfolio)’ Renaissance Technologies has the largest stake with 6.35% of outstanding shares. Other guru shareholders are Spiros Segalas (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), John Hussman (Trades, Portfolio) and Philippe Laffont (Trades, Portfolio).
Portfolio composition and performance
As of the end of the fourth quarter, over 75% of Pershing’s $6.55 billion equity portfolio, which is composed of eight stocks, was invested in the consumer cyclical sector, followed by much smaller holdings in the financial services, health care and real estate spaces.
The remaining stocks that make up the firm's portfolio are Hilton Worldwide Holdings Inc. HLT, Lowe’s Companies Inc. LOW, Restaurant Brands International Inc. QSR, Berkshire Hathaway Inc. BRK.B, Starbucks Corp. SBUX, The Howard Hughes Corp. HHC and Agilent Technologies Inc. A.
After several years of underperformance, Pershing Square made a comeback in 2019 with a return of 58.1%. This was substantially above the S&P 500 Index’s 31.49% return.
Disclosure: No positions.
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