Why Shares of Chipotle Are Soaring in After-Hours Trading

By Markets Fool.com

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Shares of Chipotle Mexican Grill (NYSE: CMG) got a much-needed shot in the arm in after-hours trading on Tuesday, when it was announced that Pershing Square Capital Management has purchased 9.9% of the burrito chain.

Chipotle's stock is "undervalued and is an attractive investment," says Pershing.

Pershing Square is one of the best known hedge funds in the world thanks to its founder Bill Ackman. The billionaire investor has assumed an increasingly activist bent over the past few years, most recently stirring a shake-up at consumer-products giant Procter & Gamble that ended in the ouster of its chairman and CEO.

He's also been publicly active in attacking Herbalife, calling the multilevel-marketing company a Ponzi scheme and shorting its stock. And earlier this year, Ackman testified before Congress concerning his investment in Valeant Pharmaceuticals, which has drawn fire for raising the price of prescription drugs.

By the sounds of it, Ackman's intentions toward Chipotle are friendly, as Pershing Square's regulatory filing announcing the stake compliments both Chipotle and its leaders: "[Chipotle] is a leading fast casual restaurant company that [Pershing Square] believes has a strong brand, differentiated offering, enormous growth opportunity, and visionary leadership."

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At the same time, Pershing is clear that it intends to engage with Chipotle's leadership: "[Pershing] intends to engage in discussions with [Chipotle] and [Chipotle's] management and board of directors, other stockholders [...] and other interested parties that may relate to the governance and board composition, business, operations, cost structure, management, assets, capitalization, financial condition, strategic plans, and the future of [Chipotle]."

It's impossible to say what this means for Chipotle, though I'd be hesitant to assume that Ackman's presence will augur in any type of substantive change in direction for the restaurant chain, which is already capably managed. A more likely outcome is it will just improve investor sentiment toward Chipotle's stock, which of course would be much appreciated.

Shares of Chipotle have struggled since a series of foodborne-illness outbreaks at the end of last year caused its sales to fall sharply. In the first quarter of this year, same-store sales at locations open at least a year dropped 29.7%. They improved in the second quarter but were still off by 23.6%.

The effect on Chipotle's share price has been significant. After reaching $750 a share in 2015, they fell to as low as $384 last month. Before Pershing's announcement, they were at $414 per share -- down 45% from last year's high.

Thus, while the surge in after=hours trading following today's news will only make up a little of this deficit and the gains may be fleeting, it's safe to say that Chipotle investors will take what they can get right about now.

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John Maxfield owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Valeant Pharmaceuticals. The Motley Fool recommends Procter and Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.