Chipotle has been a stock market winner over time.
Chipotle Mexican Grill (CMG -0.66%) recently joined the growing list of top companies to announce or complete stock splits. The fast-casual chain executed its operation late last month, and shares began trading at their post-split price on June 26. This represented a major move for Chipotle, as it marked the company’s first-ever stock split — and the 50-for-1 operation was one of the biggest in New York Stock Exchange history.
The restaurant chain decided on the move after its shares soared more than 300% over the past five years, reaching beyond $3,000 in recent times. The split brought the price of each individual share down to about $60, making the stock easier for a wider range of investors to access. A stock split is just a mechanical operation, though — it doesn’t change anything fundamental such as valuation or market value. This means it isn’t a good idea to buy a stock just because it launched a stock split.
Since you may now be wondering about how you should approach the Chipotle investment opportunity today, here are three things to know before you buy or sell shares of this top restaurant chain.
Image source: Getty Images.
1. Expansion is driving revenue growth
Chipotle has progressively increased revenue over time, even during tough moments like the worst of the pandemic. Then, Chipotle focused on its digital ordering platform, and this kept diners coming back.
But it’s important to note that Chipotle isn’t seeing tremendous growth at its individual restaurants from year to year. Instead, it’s mainly growing by adding new restaurants. For example, in the most recent quarter, total revenue climbed more than 14% to $2.7 billion — but comparable restaurant sales only increased 7%. This isn’t a one-quarter thing, but an ongoing trend.
Of course, Chipotle still has quite a way to go in its expansion plan as it aims to expand from about 3,500 locations to 7,000 in North America, and it’s on track to meet the goal. So, there’s room for more growth. Still, when it comes to comparable sales growth, the opportunity may be limited, and that could limit overall growth over time.
2. Chipotle has a decent moat
A moat is a competitive advantage that comes in many forms. In the case of Chipotle, the company’s moat is the brand it’s established, promising fresh and quality ingredients — and bringing back favorite recipes for a limited time. (Most recently, this involved adding Chicken al Pastor back to menus.) This has kept customers coming back to Chipotle over time — and rushing to get there for these special menu items that won’t be around for long.
It’s particularly challenging to stay ahead of rivals in the fast food and fast-casual businesses, as new places pop up and people are always willing to at least give them a try. So, it’s key to build a relationship with customers over time to increase the potential for revenue growth moving forward.
Chipotle’s moat is part of the reason investors were willing to pay thousands of dollars for one share earlier this year — and at a high valuation. The chain has proven it can be a favorite of customers for the long term, and this could keep revenue advancing.
3. Valuation is high
As I mentioned above, investors have been willing to pay top dollar for access to Chipotle stock. That hasn’t changed post-stock split. Today, the shares trade for more than 55 times forward earnings estimates, which is very high for a restaurant stock. Though the businesses aren’t exactly the same, for a rough comparison, fast food giants McDonald’s and Yum! Brands trade for about 20x.
CMG PE Ratio (Forward) data by YCharts
Though Chipotle may deserve a higher valuation than peers, the current level still looks pretty steep — and could discourage some investors from buying the stock, especially if they consider the company’s growth now and future prospects.
Should you buy or sell?
Should you buy or sell Chipotle stock? The answer to this depends on your investment style. If you’re seeking to diversify and want to add a strong restaurant player to your portfolio, you may consider buying a few Chipotle shares and holding on for the long term. Growth, even if not tremendous, isn’t over — and the shares could climb from today’s level over the long run. So, you could win by buying now and holding on for a number of years. This is also why you may want to hold on to at least some of your Chipotle shares if you’re currently a shareholder.
But if you’re a value investor, you’re better off removing Chipotle from your investment menu right now. The stock has become very expensive, meaning it’s not a good fit for your strategy — and you’re likely to find a more appetizing choice elsewhere.
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
