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Turning up the Heat…
The Hot IPO Trader
Monday, January 23, 2006
By Louis Basenese
#24
** Turning up the Heat…
After using the weekend to wrap up my research on Chipotle (NYSE: CMG), I got all the confirmation I needed this morning that this IPO should have a strong debut. (And in the famous words of The A-Team’s Hannibal, “I love it when a plan comes together.”)
Let me explain…
Prior to an announcement this morning, there was plenty to like about Chipotle. Formed in 1993 and acquired by McDonald’s in 1998, the company’s been experiencing blockbuster growth. In just three years, the company’s doubled in size in terms of revenues and store locations. Better yet, with 489 locations spread across 22 states, the company has no designs on slowing down.
Projections for 2006 include opening 80 to 90 new stores. And with each new location averaging annual sales of roughly $1.4 million, that’s more than $100 million in additional sales. Tack on the company’s above-average same-store sales growth rate of 10.2%, and that’s another $50 million in revenues (suggesting at least a 36% upside in annual revenues in 2006 alone).
Of course, it doesn’t hurt that Chipotle operates in the fastest-growing segment of the $300 billion restaurant industry called “fast-casual:” a segment worth $7 billion (and growing), and characterized by customers who expect food quality that’s in line with full-service restaurants, but prepared with the speed and convenience of fast food.
Chipotle’s focus on fresh, organic ingredients also bodes well considering the growing demand for such foods – a trend being played out in the appreciation in shares of organic food grocery chains Whole Foods and Wild Oats (both up more than 60% in the past year).
Rounding out the case for Chipotle is a strong management team that’s learned McDonald’s ways of continually finding and expanding into new markets… and also a balance sheet able to support its capital expansion plans and the fast-approaching spring and summer months in which consumers eat out more as the periods of inclement winter weather come to a close.
Not to mention the company’s historical return-on-investment of 30% and its ability to leverage fixed costs across a growing store base is likely to attract investors in droves.
For all the reasons above, and the fact that investors have been anticipating the deal ever since the company filed plans for an IPO back in October, we’d be hard-pressed to pass up this opportunity. And if we had any reservations they were quickly erased this morning when the underwriters raised the estimated price range to $18 to $20 a share (from the previous $15.50 to $17.50 range).
In sum, this is an IPO too hot to pass up. Shares should price Wednesday night and begin trading on Thursday. And unless something drastic and unforeseen happens, here’s our plan of attack.
Action to Take:
Buy Chipotle (NYSE: CMG) at market when shares begin trading Thursday. If you need to use a limit order, I recommend setting your initial price at $26 (but remember to adjust as necessary to get a fill).
Keeping with our discipline, let’s set some profit targets:
Profit Target 1: Sell half of your position if shares climb 25% above your entry.
Profit Target 2: Sell half of your remaining position if shares climb 50% above your entry. Let the remaining half (or 1/4 of your original position) ride.
Good investing,
Louis Basenese
Stock
Current Price
Comments
Chipotle (NYSE: CMG)
New
Buy at market on Thursday.
Linn Energy (Nasdaq: LINE)
$21.15
Buy. Sell stop is $19.
Basic Energy Services (NYSE: BAS)
$24.90
Hold. Sell stop is $20.
Hercules Offshore (Nasdaq: HERO)
$34.49
Buy. Sell stop is $28.
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