CMG

Chipotle: Buy, Sell, or Hold?

Last month, Chipotle Mexican Grill (NYSE: CMG) announced plans for a 50-for-1 stock split. Since the announcement, the fast-casual Mexican restaurant's stock has jumped 7% to an all-time high of about $3,000 per share.

Those latest gains capped off a one-year surge of more than 70%. Given this strong rally and the excitement around the 50-for-1 split, let's dive into this business to see how investors should proceed with Chipotle stock.

What's going on with Chipotle's stock split?

If approved at Chipotle's annual meeting on June 6, shareholders on record as of June 18 will receive an additional 49 shares for each share held after market close on June 25.

The stock split will increase the number of outstanding shares without changing the company's market capitalization. Think of the process like cutting a burrito into 50 smaller portions; while the overall size of the burrito remains unchanged, there are now more portions.

While the stock split won't inherently change the value of Chipotle's business, it would bring current share prices down from nearly $3,000 to about $50. That makes it more approachable for retail investors, and with more people able to afford shares, demand for the stock could rise.

Chipotle is generating record revenue and profit

As for the business itself, Chipotle is putting up record financial results with $9.9 billion of revenue and $1.2 billion of net income for 2023, up 14.3% and 36.7%, respectively. Comparable sales increased 7.9% for the year, while restaurant-level operating margin jumped from 23.9% to 26.2%.

Pandemic-era initiatives continue to pay off for the company as well. Of the 271 new restaurants opened in 2023, 88% featured a Chipotlane drive-through. Digital orders made up 37.4% of revenue last year, and the company's rewards program topped 36 million members. For 2024, management expects comparable sales growth in the mid-single-digit range plus 285 to 315 new restaurant openings.

This leading restaurant chain still has room to grow

Chipotle started the year with 3,437 locations. While current guidance suggests the company could expand its locations 8% to 9% this year, management has also mentioned a long-term goal of more than doubling its store count to reach 7,000 restaurants in North America.

The company also believes average unit volumes can climb from their current $3 million to $4 million. Based on those long-term targets, annual revenue could reach $28 billion, or about 180% higher than last year's result.

Thanks to its strong balance sheet and rising cash flows, Chipotle can afford the investments to make management's long-term targets a reality as well.

Two people eat burritos.

Image source: Getty Images.

Is Chipotle a buy, sell, or hold?

Before purchasing any stock, even one firing on all cylinders like Chipotle, it's imperative to assess the company's valuation.

As of this writing, Chipotle trades at a price-to-earnings (P/E) ratio of 67. That compares to a P/E ratio of just 25 for the S&P 500. While value investors may be shaking their heads at the thought of investing in any stock with a price tag as high as Chipotle's, its current valuation is roughly 14% lower than its five-year average of 78, despite the stock's strong gains in the past year.

Management has an attractive long-term vision and the track record to back it up. Investors willing to pay the premium should have a long-term mindset and stomach for volatility as a single earnings report that comes in below expectations could send the stock plunging.

Should you invest $1,000 in Chipotle Mexican Grill right now?

Before you buy stock in Chipotle Mexican Grill, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Chipotle Mexican Grill wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.

See the 10 stocks

*Stock Advisor returns as of April 8, 2024

Collin Brantmeyer has positions in Chipotle Mexican Grill. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Tags

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.