A Time For Value: CVS > CMG Right Now
There is a season for everything according to the Bible (Ecclesiastes 3:1). The same thing applies to the stock market. There’s a time for growth and a time for value, a time for commodities and a time for tech. The key is to be flexible and recognize the environment you’re in.
My contention is that now is a time for value and I’m going to make this argument by comparing and contrasting the stocks of Chipotle (CMG) and CVS (CVS) which each reported 4Q21 earnings heading into Wednesday’s session. Investors are buying CMG (currently +9%) and selling CVS (-5%) Wednesday when they should be doing the opposite IMO.
CMG is a great company. They make high quality Mexican food quickly at a reasonable price and is a favorite of the younger generations. CMG will be around for a long time and there will be a time to buy its stock – but that time is not now.
On Tuesday afternoon, CMG reported what looked to me like a mixed quarter. Same store sales were +15.2% but Restaurant Level Operating Margin declined 330 basis points compared to 3Q21 to 20.2%. As a result, EPS declined 21% sequentially to $5.58. On CNBC Tuesday afternoon, CMG CEO Brian Nichol said there is a seasonality to the burrito business and the fourth quarter is not the best. However that may be, CMG didn’t not see any margin compression from the 4Q20 compared to 3Q20. Therefore, it’s my belief that inflation is currently eroding their margins, similar to Starbucks.
In addition to margin pressure from inflation, CMG is currently trading at 72x my 2022 EPS estimate of $24. In other words, CMG is a growth stock and much of its intrinsic value lies in future earnings. The problem here is that interest rates are rising which increases the discount rate and decreases the present value of future earnings. As good a company as CMG is, it is my belief that its stock will suffer multiple compression going forward as interest rates rise.
CVS is by no means a sexy company but its stock chart above is. And it’s an example of the kind of boring value stock that is going to continue to work in an inflationary environment with rising interest rates IMO.
Wednesday morning CVS reported solid 4Q21 earnings. Overall Revenue was +10% and comps in its retail and in store pharmacy segment – which accounted for about half of its Adjusted Operating Income in 2021 – were +13.4%.
Unlike CMG, Overall Adjusted Operating Income Margin was down only 10 basis points vs 3Q21. CVS guided 2022 Adjusted EPS to $8.10-$8.30 giving it a 13x P/E at the middle of the range. With most of its intrinsic value in current and near term earnings, CVS is far less sensitive to rising interest rates than CMG.
In conclusion, it is my belief that today’s bounce in CMG is to be sold while today’s selloff in CVS is just a hiccup in a longer term uptrend.