Earnings: Chipotle's Q3 Forecast Is Gloomy; Is AT&T's Q4 Outlook What Investors Want To Hear?

Chipotle Mexican Grill, Inc. CMG is set to report after the bell today and, given the tough time it has had recuperating from an E.coli outbreak a year ago, the burrito maker’s earnings are likely to be of high interest to investors. Yet, it’s the post-release conference call at AT&T Inc. T that may generate the most buzz: How often does Ma Bell cough up $85.4 billion for a media company?

AT&T Has Earnings Out Too

Earnings, what earnings? In what is generally considered an offbeat move, T broke news of its mega-billion dollar buyout of TWX only days before releasing its Q3 earnings. Might this move have made its results a moot point? Analysts admit they’re more interested in what T’s plans are for the so-called “vertical” integration of TWX than they are the profits and revenues for the quarter, which are expected to be modestly upbeat.

What do they want to know? Is there a clear need for a “content king?” Is this a reinvention of Ma Bell’s business? What might T be seeing down the road that would make this purchase worth the investment? Where is the future for media buyouts like this? Also, T executives will likely be asked to address the concerns from several sides. Wall Street’s first impression was negative - the stocks of both companies have slipped since the announcement. Washington has taken a cautious tone as well, with a number of elected officials immediately coming out against the merger. Furthermore, Fitch Ratings announced it would be reviewing its rating of T in light of the enormous amount of debt it may take on to pay for the deal.

As for the earnings themselves, analysts reporting to Thomson Reuters are projecting earnings of $0.74 a share, flat to the year-ago profit, on revenues that are slightly higher at $40.9 billion.

Short-term options traders have priced in a potential share price move of 1.5% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform from TD Ameritrade.

On the call side, buyers have been present at the 38-strike, with put buying at the 36.5 and 34 strikes. The implied volatility is at the 58th percentile. Please remember past performance is no guarantee of future results.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

Will Chipotle Ever Fully Recover?

Apparently, many remain unconvinced that the Mexican restaurant chain, once a darling of both Wall Street and Main Street, will ever regain full health after a chain of E.coli, salmonella and norovirus outbreaks crushed years of breakneck growth, sales and traffic. Even giving away millions of dollars in freebies didn’t seem to be enough to lure loyalists and casual friends back into Chipotle restaurants, which are also feeling the pain of an industrywide sales slump.

In the days leading up to today’s after-the-bell earnings report, a handful of analysts downgraded the stock and pulled back initial sales and profit forecasts. Here’s what Raymond James analysts had to say: “[W]e are increasingly of the view that lost sales (still down 15%-20% nearly a full 12 months after the initial E.coli incident) could prove to be more permanent in nature, which creates additional downside risk in the stock. We suspect the remaining sales decline reflects a more permanent change in frequency/loyalty among some consumers (from unusually high levels prior to the incident) rather than elevated food safety concerns.”

If there’s some spice to the report it may be that the deep sales declines at CMG restaurants open longer than a year—an important industry metric known as same-store sales—are starting to slow down, according to analysts polled by Thomson Reuters. Analysts are looking at a Q3 pullback of 17.5%, which ordinarily may be tough to swallow but tastes better than the 30% dive in Q1 and the 24% drop off in Q2.

Thomson Reuters polls have analysts, on average, projecting profit to plunge some 65% to $1.59 a share from $4.59 a year ago, before the food-safety scare. Revenues are expected to be 10% lower at $1.09 billion,

Short-term options traders have priced in a potential 7% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator.

Buyers of weekly puts have been most active at the 400-strike while call buyers have been seen at the weekly and monthly 420 strike. The implied volatility is at a relatively high 51st percentile.

Probability analysis results from the Market Maker Move indicator are theoretical in nature, not guaranteed, and do not reflect any degree of certainty of an event occurring.

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