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RVB's Market Musings

What began here as an avenue to interact and learn has far exceeded those goals.

If you are a prospective employer, please consider this site a place where you can see my passion for investing...

Wednesday, January 04, 2006

Hungry? Try a really really big burrito

I'm smitten. I love Chipotle. The food is great and the company will be issuing stock to the public very soon. Do I like it?

No. I love it. But it's risky. So are alot of things in life - driving, marriage, flying, etc. I have roughly 30 years before I officially retire, so "risky" can mean opportunity to me.

Chipotle is profitable. This is not a hype-IPO like Caribou Coffee, which has debt covenants from African nations that specify odd things. That was a terrible IPO and should never have been hyped. Warren Buffett talks about your "investment punchcard". This idea is that you get 20 punches on your card in your life. Use them wisely.

I think that this might be worth a punch. And I don't say that because of hype. Or because my tummy loves the barbacoa burrito. In fact, I still maintain that the food at rival Qdoba is even a tad better. However, Qdoba is owned by Jack-in-the-Box and thus there is no pure play on it aside from franchising some restaurants. The chipotle S-1 is online. It does a good job of warning about the risks in the stock, and there is a caveat that the common shares only get 1/10 the voting power that the class B shares do. Also consider that it is expected that McDonald's, which owns 92% of the shares currently is likely to continually reduce its stake in Chipotle. This could result in more selling pressure on the stock than buying pressure.

The price has initially been set to be around 15.50 to 17.50. I would expect that when CMG (the proposed NYSE ticker for Chipotle) begins trading that it opens higher than that, and investors/underwriters cash in. Of course that is pure speculation, but it would be similar to what UnderArmour (UARM), another hot, profitable, crazily growing IPO did very recently.

Let us think about the statement, and well documented fact, that most companies perform poorly after their IPO's. I have a problem with using this statement to describe Chipotle. My problem is that it's not a normal IPO! It's a partial sell off! Some of the great sell offs in history include The Limited's (LTD) sell off of Abercrombie and Fitch (ANF), GE's recent sell off of Genworth Financial (GNW).

Chipotle is a great business. Yes, there are some risks, like construction costs, nutrition concerns (when has that been a concern for Americans, the fattest nation in the world?), competition, additional expenses from being public, demographics, yada yada yada. Those risks are not unusual. The one risk that does concern me is that there is mention of potential costs incurred as a result of a security breach that the company encountered. Whoa. Huh? I'm unfamiliar with this kind of a risk.

So, what's the conclusion for now? Time to dive into the numbers. This stock could be a winner for the long-run. But it's probably also going to be a favorite with traders because it's gonna be volatile. That much seems certain for now.


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