Shares of Chipotle Mexican Grill (NYSE:CMG) opened higher on Wednesday. That's just what happens when a popular activist investor takes a nearly 10% stake in a stock. A Schedule 13D SEC filing after Tuesday's market close showed that Bill Ackman's Pershing Square Capital Management had taken a chunky 9.9% position in the troubled burrito roller.
Ackman doesn't always get it right, but when an iconic hedge fund manager takes a significant stake in a battleground stock, one would expect the bears to concede today's battle, saving their ammo for tomorrow's war. That wasn't the case. Several Wall Street pros that aren't sold on Chipotle as a smart investment chimed in with their concerned voices.
- Stifel analyst Paul Westra -- one of the biggest bears on the stock, with a "sell" rating and a $215 price target that is roughly half where the shares are now -- argues that investors should sell into today's rally. The stock is way too overvalued in any scenario, according to Westra. He suggests that the mathematical laws of discounted cash flow analysis simply do not apply, given the stock's lofty market premium even in this depressed state.
- "This new development seems likely to increase the volatility in CMG shares, which have already been fairly volatile in recent months," warns Nomura analyst Mark Kalinowski. Nomura has a "neutral" call on the stock.
- Even a non-bear like Oppenheimer's Brian Bittner is concerned that there may be more risk than reward for shareholders at current levels. He has a "perform" rating on the stock, but he doesn't see how Ackman's team will be able to squeeze improvements out of the Chipotle boardroom. With concerns about diminishing returns on capital and uncertainty surrounding unit growth, this might be a tricky investment until there are signs of a sales and margin turnaround.
No golden arches
Bulls are also sounding cautious. Buckingham analyst John Zolidis shot down the chatter surrounding McDonald's (NYSE:MCD) -- the burger giant that originally took Chipotle public before spinning it off entirely -- stepping back in as a buyer.
Zolidis has a "buy" rating and an ambitious $547 price target on the stock, but the allure of arming McDonald's with a growth vehicle can't come at a price that will be highly dilutive to its shareholders. Besides, McDonald's is just starting to bounce back after a rough patch of negative comps that lasted for two years. Does it really want to get back into a negative-comps turnaround situation?
Investors should temper their enthusiasm when it comes to Ackman's move. No publicly traded restaurant operator will want a piece of a deal that would be dilutive to earnings, and there aren't many that can afford Chipotle's $12 billion price tag before considering a buyout premium. There aren't too many needle-moving changes that Ackman can possibly propose. The boardroom will erupt in laughter if someone suggests refranchising the 2,124-unit chain.
This doesn't mean that Ackman's arrival is a negative development, even if it may prove to be a bit distracting at a time when focus is in order. Today's the wrong day to talk Chipotle down.