Chipotle Up So Big on So Little

Remember when we expected Chipotle (CMG 1.39%) to put up double-digit growth numbers? Now, the stock is popping 23% in one day on a whopping 2.2% same-store sales increase.

In this episode of MarketFoolery, Chris Hill and Bill Barker talk about the state of Chipotle, and a few of the market's other biggest stories. Facebook's (META 3.04%) revenue and growth numbers were phenomenal for a company of its size, but don't assume it's smooth sailing from here. O'Reilly Automotive (ORLY 0.31%) seems to be doing better, and has a more sustainable plan for growth. Royal Caribbean (RCL 3.65%) clocked in record earnings, but the stock still fell after the report came out. Tune in to find out more.

A full transcript follows the video.

This video was recorded on April 26, 2018.

Chris Hill: It's Thursday, April 26th. Welcome to MarketFoolery. I'm Chris Hill. Joining me in studio, from Motley Fool Asset Management, Bill Barker. Happy Thursday!

Bill Barker: Thank you!

Hill: How exciting is it in the Motley Fool Asset Management office when it's this time of year? And by this time of year, I mean Earningspalooza. Is it frenzied? Is it hectic? Is there excitement? What's going on among you and the other people at Motley Fool Asset Management?

Barker: It's not frenzied. Of course, everything comes out after hours or before hours, so usually there's plenty of time to digest everything, especially the after-hours reports. It's more fun. There's more real information, since we invest based on earnings, the long-term cash flows that a business is capable of providing shareholders, and the earnings reports give you more information about that than just about anything else. Quarterly earnings should be measured in terms of how much they mean. They don't always mean as much as it seems. But they are about earnings. And that's what we're investing for.

Hill: So, the frenzied scenes from movies like Wall Street, that's not really necessarily what's going on?

Barker: The Wall Streets, they're not frenzied about earnings reports. I mean, if you go back and watch, it's about rumors, it's about conjecture. "Look, that thing is moving, what's up?" And then there's a lot of frenetic guessing. I don't know if that's a good representation of the way any office on Wall Street worked back in the day. It may or may not be. I wasn't there to see it. But, go back and look, it's not, "Look at this quarterly earnings report."

Hill: It's Blue Horseshoe loves Facebook, and Blue Horseshoe loves Chipotle.

Barker: In fact, I think Bud Fox comes and pitches Gekko his idea on the real earnings of a company, and he has this idea that he has done fundamental research on, and then it misses.

Hill: And Gekko says, "That's a dog with fleas."

Barker: Yeah. "We're done. We're done with that kind of thing. Go get me a rumor."

Hill: Let's get to actual earnings. We'll start with Facebook and Chipotle. We've talked about Facebook so much recently, we don't have to spend a lot of time on this. But, in terms of the actual earnings of this company, first quarter, they posted record revenue. And as much as anything, what caught my attention was the fact that the amount of cash on hand that Facebook has, which is a lot, has doubled in the past two years.

Barker: Sure. The pile of cash is the result, of course, of their earnings. What catches my eye, just going down their year over year results, advertising revenue up 50%, total revenue up 49%, income up 64%, net income, 63%, diluted earnings per share up 63%. Those are hard to believe numbers, for a company the size of Facebook to throw 60% bottom line growth at any point at the size that it is. So, that's the story of why the cash pile is growing. How do you spend all that money? Now, they're going to spend some of it going forward on compliance.

Hill: On hiring.

Barker: Hiring, well hiring, and for, in part, not just but in part, for trying to be a little bit more compliant with the regulations that may be coming.

Hill: Right. I saw a little bit of this reaction this morning when I was looking online, for anyone who's taking the tack of, "Well, that's all behind them, that whole Cambridge Analytica thing is completely behind them," well, no, not really. Hiring takes time. They're going to be staffing up, they're going to be spending on compliance. In a way, this quarter, as impressive as it is, is not necessarily reflective of the work that remains to be done at Facebook with regards to what happened with Cambridge Analytica. It's almost like the quarterly results six months from now, nine months from now, are maybe going to give us a clearer sense of, in addition to what they're spending now, how much more they're going to be spending.

Barker: Yeah. They'll keep making money. The quarterly report that just came out cannot capture the problems that will ultimately arise out of the Cambridge Analytica thing, because that was so late in the quarter. In terms of the bottom line, it may be far less of an effect than people have feared, but regardless of what it is, I don't think that 60% bottom line growth is something to expect for any longer, because they have to make some changes to the business.

Hill: Let's move on to Chipotle. First quarter revenue came in higher than expected. How good was this quarter, because the stock is up 23% this morning? And I'm wondering if we're maybe seeing some combination of, these were good results, and also, our expectations were really low. Because, their same-store sales are positive, but they're 2.2% positive. For those who have just started paying attention to Chipotle in the last couple of years, there was a decent stretch, go back maybe five years or so, where, if Chipotle wasn't putting up double-digit comps, people would look around and say, "Oh my God, can you believe they only put up 9% same-store sales growth? What's wrong with them?" And now we're throwing them a parade over 2.2%.

Barker: Yeah. In comparison with Facebook, this is a rather stark illustration of the degree to which, on a quarterly basis following a report, the stock move is not reflective of the pure numbers, but the numbers against the expectation of the numbers. Revenue up 7.4% year over year. Comp stores up 2.2%. Margins improved a little bit, which is good because the decline in the margins has been a major part of the story. It's an effect of fewer people going through the restaurants, and also higher labor costs. 

All of which has resulted, in part benefiting from the tax cuts as well, 33% diluted earnings per share increase. So, stock up 22% or 23%, whatever it is right at the moment, that's really not in line with those 2% comp increase, 7% total revenue increase. But, we had gotten used to very low expectations for the company. I'll also say, given the raised share price of Chipotle once again, you have to say, why is it trading for quite that high a multiple? Because we're getting back to, I don't know, 50-60X earnings.

Hill: There does seem to be near-universal praise for the new CEO, Brian Niccol, and the way he handled the call, not just in terms of the questions he was asked, but also the direction that he's looking to take the company in. He seemed to be pretty steady and very clear-eyed about the challenges that they face and what they want to do in terms of expanding on things like digital sales, which were a decent bright spot in this latest quarterly report, digital sales up 20% year over year. That's not enormous, but if they can continue to move in that direction, that's going to help them.

Barker: Yeah. I think, as we often touch on, he has an easy act to follow, in terms of quarterly conference call delivery. And, to have a vision and to have, in particular, I think, a vision of how to rework the advertising, and that plays to his strengths, when you think about how much advertising is a part and was a part of his work at Taco Bell, as compared to what Chipotle has chosen to do, it had really gone a long way with very little at least on-air advertising. You see more print advertising for Chipotle. But, there's a lot of room to expand the mindshare if you have a vision for how to go about the advertising. 

Hill: Restaurants were very much in the news this morning not just because of Chipotle's results, but because of Jim Chanos, the famed short seller who came out this morning on CNBC and talked about, among other things, his short position in Dunkin' Brands (DNKN) and Restaurant Brands, which is the parent company of Burger King and Tim Hortons, and talking about how, "Well, nobody's really going to restaurants." It was a little bit of a combination of, "This is a valuation, I think Dunkin' Brands and QSR are a little too pricey, and also, I don't think people are really going to restaurants." 

And, by the way, he also shared that he's held these short positions for about a year. I guess he's being public with them now, maybe in the hopes that the stocks will start heading south, because, I haven't looked at QSR, but Dunkin' Brands stock over the past year is up somewhere in the neighborhood of 12-15% or so.

Barker: Yeah. And we don't know exactly when he would have started shorting. Around a year is a round figure, so maybe he's done better than that, maybe he's done worse. I think that QSR has done worse. If he's been short for a full year, then I think he has made money on the short position there. Not a lot of money. And the short portion of the assets that he manages has had a rough year, as one would suspect, last year. I think they lost 12% on the short portfolio, from what I read earlier today, which is not necessarily terrible, because the market was up more than that. But, that's not making money. That's not demonstrating, on a one-year basis, some expertise at shorting in that particular year. He made his name on things like shorting Enron, though, which probably made a lot of money.

Hill: Yeah. [laughs] Yeah, probably.

Barker: So, the restaurants, they were getting hit a lot harder middle of last year, much like some other aspects to retail, have made a bit of a comeback. The numbers for restaurants are not bad. Domino's had a great quarter that it just reported today, much better than Chipotle's. The stock is up nicely, but not 22% nice, I think it's up 6-7% or something like that.

Hill: No, but over the past three years, it's done a hell of a lot better than Chipotle's shares have done. Patrick Doyle, the CEO of Domino's, steps down, I think, in June. This is either his last quarter as CEO or his second-to-last quarter as CEO. And he's going out with a bang, and he's ending one of the great runs a CEO could have.

Barker: Yeah. For the most recent quarter, the comps were up 8%. And boy, that takes care of itself, when you can do that for any prolonged period of time. Of course, that's how Chipotle got as pricey as it did, was doing even better than that for a long period of time. When you start looking out ahead and compounding teen-level comps, you get to huge numbers. And that's how Chipotle was being measured. It made some sense to measure Chipotle that way. And we owned it for a while in the mutual fund that I help manage, so I'm not going to say that we saw the problems ahead, because they really came out of left field in terms of initiating from the health problems, the health scares, and then compounding again and again with the additional outbreaks that they had. We didn't see that coming, but perhaps we should have been more cautious about the possibility of something really compounding comps the way that Chipotle was doing up until that period of time.

Hill: I'll just say -- and this is not particularly important in terms of what his actual job is, it's slightly important, I suppose -- Jim Chanos, I kind of like him on TV. He comes off as much more affable than the average short-seller, who is oftentimes someone who has a little bit of an edge to him or her and is, in some case, literally pounding the table about, "This is why this company is going to zero!"

Barker: Yeah. Well, I think he did talk about a couple of companies later on in the CNBC appearance today that could go to zero. I don't know that he was pounding the table. He certainly wasn't putting Dunkin' and QSR in that category. But, you were saying you'd be willing to go out to dinner with this guy. Spend an hour at dinner. So, if he's listening -- you're available. You would even treat. Dunkin'. You love Dunkin'. Take him to Dunkin' for some coffee.

Hill: I'm happy to take him to Dunkin' if --

Barker: Perhaps a donut.

Hill: Yes. But, if we're talking about actual dinner, I'm going to go out on a limb and guess that Jim Chanos has more spending cash than I do.

Barker: You're the one trying to arrange this dinner with him. I mean, maybe he's a fan, he's been listening, and he's thinking, "Chris Hill would be willing to have dinner with me? I'll pay for that." I'm saying, you would be willing to buy him a donut and a cup of coffee if it comes to that.

Hill: I would be. But you know how, from time to time, we will refer to something as having a non-zero chance? "There's a non-zero chance that X could happen." What you just laid out, in terms of Jim Chanos listening to this podcast and thinking to himself at any point, "I think I'd like to go to dinner with the guy," I'm going to go ahead and say zero chance. I'm putting that in the zero-chance category.

Let's move on, because it is Earningspalooza. O'Reilly Automotive. I don't know about you, I was a little surprised by this one. First quarter profits, higher than expected. They raised guidance for the full fiscal year, and shares of O'Reilly are up. That's about as good as it gets, as far as I'm concerned, in terms of any business and earnings report, is, "Here are the numbers we just finished up, and oh, by the way, we feel even better about the full fiscal year."

Barker: Yeah. The comps were up 3.4%, which is good and certainly better than people were beginning to fear in the automotive parts market. If you go back to last summer, there was just a momentary panic regarding all retail, and it landed on the auto parts retailers in part because of some headlines, Amazon was getting more aggressive in the space. So, the unbelievably beautiful up-and-to-the-right chart of O'Reilly in particular and AutoZone (AZO 0.53%) as well, although not quite as beautiful a chart, really was interrupted back in the summer, and they lost 30% or 40%, perhaps, from their highs. 

O'Reilly is reasonably close, after today's move, of getting back, and, I guess, today making it seem like they have more sustainable growth, at least in the short and intermediate-term. A lot of what is in the report today is decent numbers, not amazing numbers, not the kind of things that you would expect to land a better than 10% increase in the stock price. But I think that some of the fears are evaporating that they're about to be rolled over by Amazon.

Hill: We've talked before about AutoZone, and one of the points you've always made is just what a methodical job that company's management team does, in terms of buying back shares. The beautiful chart you referred to with O'Reilly, to what extent, if any, is that attributed to share buybacks? I can't imagine they are as consistent about it as AutoZone is.

Barker: A decent chunk of it is from buybacks, but not to the degree AutoZone takes it to, that's kind of extreme. And that has worked out well for shareholders to date for AutoZone. O'Reilly had 3% comps, 28% in diluted earnings for the quarter. And a lot of that was share price, a lot of it was taxes. They have been buying back, not the aggressive pace that AutoZone has had, but I think they've bought about $8 billion back in the last seven years, something like that, I want to say. And they were buying back again this quarter, they made a point of that in their quarterly report, that they bought back half a billion dollars in the last quarter, and another half a million shares since the end of the quarter. So, they're looking at that as a chunk of their earnings-per-share growth. Store openings is not as big a part as it used to be.

Hill: Long-term -- by which I mean more than 10 years, so forget the next 0-10 years for O'Reilly Automotive, AutoZone, Advance Auto Parts. But, 10 years and beyond, is this an industry you feel pretty bullish on? Because some have made the case that a ripple effect of decreased auto sales and decreased auto ownership is going to be less of a need for businesses like this.

Barker: Here's where you would get bullish. In the O'Reilly report, from the CEO, Henslee, "We believe that the long-term drivers for demand in our industry remain intact, including a growing and aging vehicle fleet that is driven over," and I'm going to leave this number blank for a second, "miles each year." So, the total fleet driven each year. "More importantly, we are confident in our ability to continue to gain market share," blah blah blah blah, "service." How many miles do you think the U.S. fleet drives in a year?

Hill: The average per person?

Barker: No, all the cars out there.

Hill: You're making me do large math.

Barker: Yes, I am. Nobody told you there was going to be math involved.

Hill: It was my understanding there would be no math. Go ahead and just share it.

Barker: 3 trillion.

Hill: Seems like a big number.

Barker: Yeah. That's enough times to drive to the Sun and back a bunch of times.

Hill: You want to make sure your AC is working, though.

Barker: So, there are a lot of cars driving a lot of miles, and they break down. The cars themselves last a lot longer than they used to. The fleet gets older and older and older because, I can't remember what the average vehicle on the road is now, but it's higher than it's ever been because they're better made, and you don't just throw a car away anymore. So, they have a lot of parts that they're able to help people replace as they age. And over the long term, yes, if autonomous vehicles and electrical cars are the norm in 10 years, then the business model is going to change drastically for O'Reilly. 

I don't know. There was a lot of interest in that last year. That was another part of it, people looking ahead and thinking that autonomous vehicles might be coming sooner than expected. There are a lot of differing opinions on that, but it's going to happen over time. So, I think that's a problem for O'Reilly, but they've shown a lot of ability to adapt.

Hill: We'll move from one mode of transportation to the other -- Royal Caribbean posted record earnings in the first quarter. Why are the shares down today? Royal Caribbean shares have not lit the world on fire over the past 12 months, I think it's barely in the positive column. So, I don't look at this company and think, "Gosh, that's a pricey stock." So, why the drop today?

Barker: First of all, it's up about 14% year over year over the last 12 months. That's not bad.

Hill: That's not bad.

Barker: That's not bad. Not as much as some other things, but hey, most people are happy with 14% a year.

Hill: Slightly more than half of what Chipotle is doing this morning. [laughs] 

Barker: Although, much better than Chipotle has done over the last, I don't know -- if you go exactly 12 months back, I don't know exactly what Chipotle's share price was. Good year for Royal Caribbean. Why the weakness today, they missed a little bit on the top line. Earnings per share did well, better than expected, but there are some increased costs that they're pointing to, including fuel, which is a major component for moving one of these things. It takes a lot of fuel to move the size of vehicle that they are producing. Vessel, it's not a vehicle. It's a vessel. [laughs] 

Hill: It's a boat, it's a large boat.

Barker: You could drive some pretty big vehicles on their vessels, though. They're unbelievably big.

Hill: They really are. You were just telling me this morning, do they have a new one? They've rolled out some new monstrosity of a vessel?

Barker: Yeah, the Symphony of the Seas is the newest record-breaker for largest cruise boat in the world, and it has, I don't know, you can go hunting on it and stuff or something. [laughs] I don't know.

Hill: [laughs] I don't think you can go hunting.

Barker: It has a reasonably sized veldt with African game animals or something.

Hill: I don't believe that's true.

Barker: It doesn't have that, although it has a big central park thing that has 20,000 plants or something like that, in the middle of the boat.

Hill: So, you've done more of the cruise stuff than I have.

Barker: I've done one.

Hill: That's one more than I've done in the last 20 years. Is that a plus? Is that what people are looking for, to be able to say, "I went on the largest boat?" Because at some point, and I'll just speak for myself personally, there's a limit to how big I want the boat to be.

Barker: Really? What is that point?

Hill: I don't know. It's not the largest one, though. This Symphony of the Seas, which is five times the size of the Titanic, the actual Titanic -- and I get that it's probably better made, better put together, but, that's a little scary.

Barker: The Titanic would be like a VW Bug now. It would not be able to get away with that name.

Hill: How great would that be?

Barker: Mini, it would be the Mini, like the Mini Cooper.

Hill: Do you think that would be a positive or a negative, if Royal Caribbean, or one of these others, Carnival Cruise Lines, came out and it's the new largest vessel, and they came out and they said, "Do you know what we're naming this thing? 21st Century Titanic." Or, some version of Titanic, the word Titanic is in there. I think that would be a plus.

Barker: You do?

Hill: Yeah.

Barker: You are not familiar with the superstitious nature of sailors.

Hill: No, I guess I'm not.

Barker: Despite growing up on the ocean.

Hill: [laughs] I didn't grow up on the ocean, I grew up on a coast, the East Coast.

Barker: Well, yeah.

Hill: So did you, by the way.

Barker: [laughs] Well, the ocean is what was on the coast.

Hill: We have friends who grew up in Chicago and they were closer to the water than you were in Northeastern Pennsylvania and I was in Central Maine.

Barker: Northeastern Pennsylvania? Get your geography right. Where do you think Philadelphia is?

Hill: Isn't it in the Northeast-ish?

Barker: No. No. How ... [laughs]

Hill: I don't know. It's your state, man, [laughs] don't expect me to know everything about your state.

Barker: It's the Southeast.

Hill: Is it?

Barker: Northeast is way, way up there.

Hill: You have a little bit of disdain in your voice when you refer to the Northeast of Pennsylvania.

Barker: I have disdain for your geography, that's what I have disdain for. What were we talking about? Oh! No! Nobody wants to name something the Titanic Part 2!

Hill: You don't think so?

Barker: No! Go ahead and try it. Sell that business plan. [laughs] 

Hill: I don't know.

Barker: What's the attraction? "Ooh, maybe I'll run into Leonardo DiCaprio here." What are the positive connotations that you are hoping for, to use in your advertisements? Run this ad for me.

Hill: Because all you have to do, if you're Royal Caribbean or Carnival or whoever has this boat, is, that first trip, as long as that's a success, curse broken. And all you superstitious sailors out there can relax.

Barker: "It's like being on the Titanic but bigger, and hopefully safer."

Hill: Exactly!

Barker: [laughs] Exactly?

Hill: That's not going to happen again!

Barker: Right?

Hill: Yeah, we're in the Caribbean, we're not up where there are icebergs!

Barker: It would be hard to tackle an iceberg in the Caribbean. But, if you're doing a transatlantic crossing, which they still do, then maybe you could find that, I guess.

Hill: Do you think we're done with the actual business part of Royal Caribbean?

Barker: You and I?

Hill: Yeah.

Barker: Yeah, probably. Feels like it. [laughs] 

Hill: [laughs] It really does feel like it. Thanks for being here.

Barker: Thank you!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you on Monday.