Chipotle Mexican Grill, Inc. (NYSE:CMG) has been showing up consistently on my radar over the last one week with a mix of analysts’ upgrades, downgrades and revisions. I deemed it fit to explore the possibility of trading CMG options today and I am pleasantly surprised by the possibilities that this burrito seller holds.
Chipotle is a $15.67 billion company that operates Chipotle Mexican Grill restaurants. Chipotle Mexican Grill restaurants serve a menu of burritos, tacos, burrito bowls (a burrito without the tortilla) and salads. Since going public in 2006, Chipotle has surprised the investment community with an impressive increase in share price over the years.
The chart above shows how the stock of Chipotle has traded in comparison to the S&P 500 from 2006 to date and you will agree with me that Chipotle has done impressively well. Chipotle’s share price has increased by 1005% compared to the 48.16% increase recorded by the S&P 500.
There’s Only So Much Growth In a Restaurant
As impressive as Chipotle’s growth is, critics will be quick to point out that the room for growth in a restaurant does not extend indefinitely. For one, a restaurant’s revenue usually increases in the first few years of its establishment as its reputation spreads. Once the restaurant has built its reputation, the volume of its patrons stabilize to the number of “regulars” and the revenue is likely to remain flat from that point onwards.
Nonetheless, I have observed two things that Chipotle is doing to ensure that it continues to grow even when the growth at its individual restaurants must stop at a point.
- Increasing the Volume Sales at Individual Restaurants
- Increasing the Number of Restaurants for a Synergy of Growth
From a single restaurant that opened in Denver, Colorado in 1993, Steve Ells says, “I certainly didn’t have any intention of opening more than just one restaurant. I just wanted to build a place where you could eat delicious food made of the finest ingredients quickly and affordably. As it turns out, it was an idea people could get behind.”
By 2006 when Chipotle filed its IPO, it already had 500 locations and it currently run about 1,458 restaurants. The journey so far is impressive; yet, I am more impressed by the CEO’s vision of increasing the number of restaurants to about 3000 domestic Chipotle’s locations. I strongly believe that the vision is achievable considering its unique position of providing “Food with Integrity”.
How it All Adds Up
As I have mentioned earlier, the growth rate in a restaurant is usually at the highest during the first few years of its opening. Hence, Chipotle can continue to record growth if it does not deviate from its target of opening 3,000 restaurants.
How to Trade CMG Options
I am bullish on Chipotle at least until it reaches the target of 3,000 restaurants or until something else happens to change my opinion on the profitability of the company. Option traders will be most impressed by Chipotle’s ability to increase its share price consistently. Shares of Chipotle are trading up 1.72% today to $504.18; yet, the stock has an unbelievably low RSI of 45.72. I am definitely getting into a position on the CMG Jan 2015 500.000 call (CMG150117C00500000). This contract is not for the timid considering its price tag but I believe we can yet squeeze out some gains on the $500 milestone.
— Daily Option Alerts