- Chipotle stock has had a torrid time, losing 40% of its value in the last one year.
- Bill Ackman owned Pershing Square Capital recently purchased a 9.9% stake in the battered burrito maker.
- Should you endorse the billion dollar move and buy Chipotle stock now?
In what came as a breather for Chipotle Mexican Grill Inc. (NYSE:CMG) stock, Bill Ackman's Pershing Square capital declared, in a recent filing, that it has acquired a 9.9% stake in the burrito maker. Chipotle Mexican Grill stock has gained nearly 6% since the news surfaced, sparking off debates whether the billion dollar endorsement is the start of a rebound in the Chipotle stock price. Should you follow the billionaire and buy Chipotle stock now?
Bill Ackman Is Now The Second Largest Chipotle Shareholder
Bill Ackman owned Pershing Square capital acquired a nearly 10% stake in the burrito company, making the billionaire investor the second largest investor of the food chain. The markets seem to be cheering the news awarding a 5.9% rise to Chipotle stock price in the last regular trading session. However, Morgan Stanley Analyst John Glass isn't convinced. The Morgan Stanley Analyst believes there is no quick fix for Chipotle. In a note to investors on Wednesday, cited on CNBC, the analyst wrote:
We see no quick fix to what CMG really needs, a revitalization of top line, and activism's traditional tools for restaurants — spin offs, refranchising, asset sales and cost cuts — don't appear to offer short term opportunities, leaving few obvious quick levers to pull.
But the presence of a large and vocal investor may provide mgmt more incentive to hasten their turnaround efforts, which appear to have stalled, and could cause the shorts to cover, at least for now.
The analyst maintained Chipotle stock at an 'Equal Weight' rating with a price target of $405/share. The target price implies a 7.6% downside to Chipotle's last traded price.
The analyst community, on aggregate, has a marginally better opinion of Chipotle. The stock currently has a consensus 'Hold' rating with an average price target of $438.42, which is close to where the stock closed the last trading session. While the analyst community does not think too highly of Chipotle and its turnaround, Bill Ackman's entry could turn the scales in favour of a successful turnaround.
Changes to Expect
The entry of an activist investor onto the scene will nevertheless have some effects on the way the things have been running. In what should be very obvious, improvements in corporate governance and a greater focus on the turnaround efforts will be in focus. The once darling stock on Wall Street has had questions raised recently on the executive compensation policies at the company and the need to link them to performance.
Shareholders recently filed a shareholder derivative suit, a lawsuit on behalf of shareholders against the executives, complaining of lavish compensation and also accusing the executives of mismanagement. Well, this wasn't the first time shareholders have raised concerns with regard to executive compensation. The shareholders had also rejected the company's executive compensation pay in an earlier say-on-pay vote.
As per a report on Business Insider, John Glass believes that Pershing Square capital and Bill Ackman could address the following:
- Expanding the board and aligning compensation with performance.
- Hiring people with required skill sets with a focus on marketing, cost control and IT to improve the management team.
- Focus on margins.
- Try out new concepts.
- Limit new unit expansion.
Focus Will Be Back On Chipotle Profit Margins
Chipotle has, historically, focussed on new unit additions as a key driver of growth. The strategy worked fine as long as the firm's same-store sales were growing rapidly as it led to margin expansion, which offset the lower margins from new store openings.
Source: Motley Fool
However, with the same store sales metrics now declining for three straight quarters, unit growth could accelerate the margin contraction which the firm is already experiencing. Hence, the focus on margins and limited unit expansion should aid Chipotle's recovery process.
While it is still too early to predict a successful turnaround, if you have an appetite for risk, now would be a good time to buy Chipotle stock. The later the entry, the lower the gains will be. However, the earlier the entry the greater the gains could be. Aggressive investors should consider a small stake here, given that Bill Ackman's entry should align management compensation with stock performance and drive a greater focus on the management skillsets and margin expansion. Also, limiting new unit expansion until margins begin to grow will aid overall margins of the burrito chain. Buy in if you have an appetite for risk. The chances of a successful turnaround, in my opinion, are now higher.