Chipotle Not Too Hot for Bulls After 79% Annual Advance: Options

Chipotle Mexican Grill Inc. (CMG), the best stock performer among U.S. restaurant chains last year, remains a favorite of options traders who bet its new outlets and food choices will attract health-conscious customers.

Puts that pay should the shares drop 10 percent cost 1.16 times more than calls betting on a 10 percent gain, according to one-month data compiled by Bloomberg. The price relationship fell to the lowest level since December 2012 on Jan. 13. Chipotle surged 79 percent in 2013 for the biggest rally in the Standard & Poor’s 500 Restaurants Index.

Chipotle, the burrito chain named after a Mexican smoke-dried jalapeno pepper, is seeking to attract more customers by offering food without genetically modified organisms starting this year and has broadened its menu to include tofu. The company will post its biggest profit jump in six quarters after today’s market close, analysts surveyed by Bloomberg estimate.

“Investors are optimistic about the growth aspects of Chipotle,” Serge Berger, a Zurich-based trader at Blue Oak Advisors LLC, said in a telephone interview on Jan. 28. “The company is expanding. There’s a good feeling about the continued growth of the health and quality aspect as organic food has been a big story.”

Photographer: Craig Warga/Bloomberg

Employees prepare lunch orders at a Chipotle Mexican Grill restaurant at Madison Square Park in New York. Close

Employees prepare lunch orders at a Chipotle Mexican Grill restaurant at Madison Square Park in New York.

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Photographer: Craig Warga/Bloomberg

Employees prepare lunch orders at a Chipotle Mexican Grill restaurant at Madison Square Park in New York.

Expansion Plans

Analysts say Chipotle’s net income will climb 28 percent to $78.7 million in the fourth quarter, according to the average of projections compiled by Bloomberg. Chief Financial Officer John Hartung said in October that comparable sales in the period will be “similar or slightly better” than in the third quarter, when same-store sales jumped 6.2 percent, beating estimates.

The company predicted it would open as many as 180 new restaurants in 2013 and between 180 and 195 this year. It said in October that third-quarter profit rose 15 percent to $83.4 million as more advertising boosted traffic.

Implied volatility, used to track options prices, for contracts with an exercise price 10 percent below Chipotle was 42.38 yesterday, compared with 36.59 for calls 10 percent above, according to one-month data compiled by Bloomberg. The options market is implying a 7.2 percent move on the day following the results, less than the 10 percent average after the past eight releases, the data show.

Chris Arnold, a spokesman for Denver-based Chipotle, declined to comment, citing company policy on stock moves.

GMO-Free

Chipotle’s pledge to make its food free of GMOs will lead to increased costs, said Trung-Tin Nguyen, a Zurich-based hedge-fund manager at Trimax Capital AG. The burrito maker said this month it may raise prices in 2014.

After last year’s rally, the stock already reflects the earnings potential for the fourth quarter, Nguyen said. Chipotle has declined 9.1 percent this month, more than the 7.2 percent loss for S&P 500 restaurants.

“Even by increasing prices, Chipotle probably just offsets the higher cost structure for using GMO-free ingredients,” Nguyen said in an interview on Jan. 28. “Overall, I am not so bullish in the short-term as I would assume that most of the anticipation should be priced in after the recent rally.”

Chipotle’s ingredient costs as a percentage of sales are about 34 percent, a number the company has said is higher than that of competitors, according to a Jan. 28 report by Bloomberg Industries analyst Barbara Pomfret.

VIX, VStoxx

The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 option prices known as the VIX (VIX), fell 3.5 percent to 16.75 at 10:13 a.m. in New York today. Europe’s VStoxx Index slipped 1.1 percent to 21.58.

The ratio of puts outstanding relative to calls fell to 1.12-to-1 on Jan. 28 and reached 1.03-to-1 last week, the lowest since September, data compiled by Bloomberg show. January $535 calls, with an exercise price 10 percent above yesterday’s close, were the most owned options, followed by January $545 calls, according to the data.

“CMG is well positioned to deliver another year of healthy growth in 2014,” David Tarantino, an analyst at Robert W. Baird Co. wrote in a note on Jan. 27, referring to Chipotle’s stock symbol. “We believe underlying brand momentum is strong.”

To contact the reporters on this story: Namitha Jagadeesh in London at njagadeesh@bloomberg.net; Corinne Gretler in Zurich at cgretler1@bloomberg.net

To contact the editor responsible for this story: Cecile Vannucci at cvannucci1@bloomberg.net

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