In news heard around the (financial) world after the close on Tuesday Bill Ackman’s Pershing Square announced a 9.9 percent stake in Chipotle Mexican Grill, Inc. (NYSE:CMG). The company has been under pressure lately due to health related issues and the stock has been taking a beating as well. While the stock has gone down, many were surprised since CMG did not seem like an Ackman type of investment (especially as some consider shares pricey despite the recent decline) even though his hedge fund has or had some big holdings in food companies  such as Nomad Foods, Wendy’s, Burger King, Mondelez etc. However, when SEQUX recently involved a big stake in CMG that could have been a sign that value investors were eager to dive into CMG.

The difference is that SEQUX is not activist while Ackman will likely want to make changes at the company – so what can Bill do? It depends who you ask although many focus on the board and emphasize that financial engineering will NOT be part of the process. Some analysts are offering ideas while Stifel has a brutal takedown of both CMG and Pershing. See below for what wall Street is saying, shares of the company were up 5.5 percent in after-market trading yesterday.

Chipotle photo Chipotle CMG Chipotle Mexican GrilL
Photo by emerson12



Chipotle Mexican Grill, Inc. (NYSE:CMG) Nomura

(If) were we in Pershing Square’s shoes, among what we would recommend to the company would include: (1) laser-like focus on brand Chipotle (divestiture or other disposal of ancillary brands)

(2) a timelyand thorough review of the cost structure of the entire organization (with amind to Chipotle’s business as it is realistically like to be in coming years, not as it was before the challenges of 2015-16 came to be known)(3) a thoughtful review of Chipotle’s unit growth rate, to ensure that it makes sense for brand Chipotle’s average unit volumes likely in coming years,

(3) a thoughtful review of Chipotle’s unit growth rate, to ensure that it makes sense for brand Chipotle’s average unit volumes likely in coming years,

(4) adding meaningful “new blood” to the board of directors. • In other words, even though we believe that Q3 same-store sales trends appear to be (yet another) quarter of “a pace of recovery not quick enough for the Street’s tastes,” there are actions that the company could take that would be shareholder friendly… and it is (to some degree) more likely than it was before that these actions could be more assertively pursued now that Pershing Square has a 9.9% ownership stake in CMG.

Chipotle Mexican Grill, Inc. (NYSE:CMG) Morgan Stanley

Likely on tap: 1.) Corporate Governance: Expanding the board, changing compensation schemes and generally creating better alignment between compensation and performance all seem reasonable. Inside ownership is relatively low currently.

2) Increase the breadth of management: The know-how to lead CMG into the future from here is likely a different skill set than what has been required for success to date as the business transitions into a more mature phase. Adding expertise in marketing, cost control and IT all make sense to use

3) Focus on margins: CMG has been slow to adapt its cost structure to the reality of lower average unit volumes. That could change going forward, though most Street models assume significant margin recapture in ’17 and ’18. But perhaps more could be done. Of note: we don’t necessarily see G&A ex stock based comp as an area for savings, and in fact could be an area of investment as additional expertise are added.

4) Fill or kill new concepts: Either they are a good area and should be grown more aggressively or divested. Their current diminutive state and lackluster growth to date don’t provide any current shareholder value

. 5) Curb new unit expansion: This is controversial, and while slowing makes sense to protect returns and increases available free cash flow, it has the potential to hurt the exit multiple paid for the stock on recovered earnings.

Chipotle Mexican Grill, Inc CMG
Chart via S&P Capital IQ

Chipotle Mexican Grill, Inc. (NYSE:CMG) – Credit Suisse

The filing notes that Pershing intends to engage CMG in discussions around “governance and board composition, business, operations, cost structure, management, assets, capitalization, financial condition, strategic plans, and the future of the Issuer.” Pershing believes that CMG has “a strong brand, differentiated offering, enormous growth opportunity, and visionary leadership.” The typical activist “playbook” in restaurants has called for a combination of refranchising, cost-cutting and leverage.

However, in our view, these options are less appealing in CMG’s case given a high current valuation, lack of franchising historically, and since CMG would be selling stores that are significantly diminished relative to historic peak volumes and profits. We would expect Pershing’s focus to center on fundamental changes to accelerate what has been a sluggish sales recovery following a string of food safety events.

Our conversations suggest that most investors generally disapprove of mgmt.’s emphasis on aggressive menu discounting to recover lost traffic (rather than restoring brand trust) and believe that a fresh perspective would be well received by shareholders.

Chipotle Mexican Grill, Inc. (NYSE:CMG) – Stifel is brutal

Pershing Position Creates Excellent Selling Opportunity

Reiterate Sell Rating Following Announcement of Bill Ackman Purchase.

We emphatically reiterate our Sell rating on CMG shares following news that Pershing Square has started a 9.9% activist position. We cannot fathom Pershing’s operational or mathematical investment thesis. Frankly, we predict that Pershing’s activist effort is most likely to accelerate and further assure CMG’s “tail operational risk” of increasing management and hourly turnover rates (the number one determinate of a restaurant’s profitability). Mathematically, we continue to assert that to justify CMG’s current $414/sh valuation, some combination of the following two irrational assumptions must be made:

Mathematically, we continue to assert that to justify CMG’s current $414/sh valuation, some combination of the following two irrational assumptions must be made:

(1) that the economic laws of diminishing returns (market-maturation curves for Restaurants) do not apply to the Chipotle Mexican Grill brand; and/or

(2) that the mathematical laws of Discounted-Cash-Flow do not apply to CMG, the stock.

Chipotle Mexican Grill, Inc. (NYSE:CMG) – Barclays

We are not surprised to see an ‘activist’ in CMG. With that said, we don’t expect a traditional restaurant activist playbook (i.e. refranchising, cost cutting, balance sheet leverage, return of cash, etc). Instead, we expect the focus to be on returning the brand to former industry leadership using past proven growth strategies. The stock is down 45% from highs reached in the summer of ’15 (vs the S&P up 5%), with the brand previously believed one of the best growth stories in restaurants. With that said, the initial sell-off was led by slowing comps and a related lack of visibility on a re-acceleration entering ‘16. And such was then accentuated by food safety challenges first disclosed in November ’15 (

Chipotle Mexican Grill, Inc. (NYSE:CMG) – Baird

Pershing Square’s stake could spur optimism that activism could lead the company to pursue certain operating or financial strategies that could help to drive incremental value for shareholders. However, with CMG already trading at fairly

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