Yesterday, David Einhorn presented the short case for Chipotle Mexican Grill, Inc. (NYSE:CMG). He gave a variety of reasons, including competition, higher costs, and valuation. Interestingly, BMO capital markets also downgraded Chipotle Mexican Grill, Inc. (NYSE:CMG) today. They do not mention Einhorn by name, but they seem to mention many of the reasons, which Einhorn states.

david einhorn

BMO

We’re lowering our earnings estimates and price target reflecting slowing traffic trends, less pricing power, and the prospect of mounting food cost inflation in 2013. Frankly, we didn’t lower our price objective enough after the company’s 2Q results. Today, we think we’re more appropriately addressing multiple contraction in the stock that we think holds for the
foreseeable future.

Question: Why did they wait for today, and not address inflation after Q2?

Einhorn ‘The ongoing threat at lower price points inhibits Chipotle Mexican Grill, Inc. (NYSE:CMG)’s ability to raise price. With upcoming commodity cost increases and added healthcare expense, this is a huge issue for Chipotle Mexican Grill, Inc. (NYSE:CMG) in the next year.’

 

Event


We’re lowering our earnings estimates and price target reflecting slowing traffic trends, less pricing power, and the prospect of mounting food cost inflation in 2013. Frankly, we didn’t lower our price objective enough after the company’s 2Q results. Today, we think we’re more appropriately addressing multiple contraction in the stock that we think holds for the
foreseeable future.

Repeat the previous question


Impact


Slightly negative. At ~$300 per share (~28x forward earnings), we think investor concerns are largely priced in the stock at this point. However, we think we could see some continued modest erosion in the valuation multiple to ~25x forward earnings.

Question: why wasn’t valuation an issue on July 19th when Chipotle Mexican Grill, Inc. (NYSE:CMG) was trading at $400 right AFTER Q2 earnings? 

Forecasts
We’re lowering our 2013 EPS estimate to $10.85 (down ~2.5% from $11.15) and our 2014 estimate to $13.50 (down ~15% from $13.71) on the prospect of higher food cost inflation next year.
Valuation

We think 25x is the right forward P/E multiple for this concept today – that’s the basis for our $340 price target. It equates to a 5% adjusted CF yield (cash flow from the existing assets after maintenance capex), which we think balances nicely with our long-term growth forecasts.

Comment: there is no proof that BMO is piggybacking off of David Einhorn. Furthermore, if they believe that Einhorn did a good job presenting the short case for CMG, and re-evaluated their thoughts, great. However, the timing is suspicious and the valuation still seems high. We know the buy-side piggybacks off of great investors like David Einhorn all the time. Is the sell-side now joining the Einhorn Fan club?

Disclosure: No position in any securities mentioned