Activist investor Bill Ackman exposed in 1st week September 2016, that he has become Chipotle's second-largest investor. On the 6th of September, Ackman’s hedge fund Pershing Square Capital Management revealed a 9.9% stake in Chipotle. Since this declaration, Chipotle shares have surged by 5.6%. Ackman ardently believes the popular nonchalant chain is underrated and has a colossal development opportunity ahead.
After almost a year of being in crisis mode, it seems activist investor Bill Ackman and Chipotle’s prospects of recovery will congregate. In addition, Ackman will engage in discussions about Chipotle's authority and board composition, business operations, cost constitution, management and more aspects of the company.
Current Share Market Scenario
In the present scenario, Pershing Square’s investment is valued at over $1 billion, assembling it amongst Ackman’s top holdings. This stake revelation is also activist investor Bill Ackman’s earliest major investment since Valeant Pharmaceuticals scandal.
Market shareholders are probably covering positions, giving the Chipotle shares a temporary shot. Nonetheless Chipotle shares continue to be a volatile stock. In addition to, while months have passed since the past scandal, fundamentals still counter harsh headwinds that set off hopes for a recovery in 2017 in doubt.
Until Chipotle starts expanding like-for-like store sales and earnings, the stock that gets more than 51 times forward earnings seems unreasonably expensive.
Factually, Paul Westra, an analyst at Stifel, recommends shareholders to get away with the stock and attributes the present share hike’s irrational assumptions. He proclaims that he fails to fathom Pershing shareholdings investment theory. Additionally, this is not the first time that Barron’s has mulled over bearishly on Chipotle shares. In December 2015, in the midst of its scandals, Westra counseled readers that when it comes to this stock, it pays to be chicken. Since then, the shares lost 17.5% of their value. The stock gave up 42% of its value when Chipotle’s share price topped $758 in August 2015. For now, that drop seems to be worthy of. Nonetheless, there is little evidence to diners up roaring for one of Chipotle’s legendary burritos, especially not like it used to be in the olden days.
However, there are other analysts that predict a positive future too. Maxim Group analyst Stephen Anderson claims profit margins to expect rising headwinds in future. This analysis is coming from confidence on promotional activities for higher food-safety conformity costs. Additionally, Anderson believes that higher wages can be a driving factor. Approximately a quarter of the chain’s restaurants will observe authorized wage hikes. In addition, the menu price will raise by 1.5%. However, with administration still struggling to gain back customer confidence, now may not be a favorable time to hike prices.
Currently, analysts reviewed by Thomson Reuters counter profit growth to pick up next year. They forecast per-share revenue of $10.41 compared to $3.87 this year.
Ackman’s quest to change the future scenario will be an interesting observation. Pershing Square fund has itself incurred huge losses this year. It still claims that Chipotle is undervalued. Additionally, it remarks the chain as a strong brand with varied offering, vast growth opportunity, and imaginative leadership. However, beyond declaring that it plans to take part in the company's strategic plans after the not-so soaring progress rate since a while now. Henceforth, activist investor Bill Ackman has backed his decision with correctives measures for the food chain. Future beholds to reveal if this will prove a wise step.