Chipotle Mexican Grill (NYSE: CMG) has split its stock in a historic, 50-for-1 transaction (one of the biggest stock splits ever). It's the first time the company, which has been public since 2006, has split its stock, and many investors are likely happy about the news -- Chipotle has had a four-figure price tag since 2020.
Management cited the usual reason for the stock split: to make it more accessible to employees and a broader range of investors. A more than $3,000 price tag could indeed feel out of reach to investors with limited funds at their disposal, and being able to give top employees more opportunities to share in the company's success can attract, and keep, talent.
For all current and prospective shareholders, here's what to expect going forward.
First, the lower share price
At market close on June 25, shareholders on record as of June 18 received an additional 49 shares for each share they already owned. And as of this writing, the stock is trading at a split-adjusted price of about $64 per share.
Stock splits don't change anything about the company besides taking the same-sized pie and cutting it into smaller pieces. Chipotle investors will just have to get used to seeing the stock trading at levels it last saw 15 years ago.
Although the market cap, which is the value of all of the outstanding shares, stays the same, the change in share price does affect per-share metrics. For example, Chipotle's trailing-12-month earnings per share (EPS) of $46.86 has become $0.94. As an aside, that's an impressive level of profitability made possible by the company's industry-leading profit margins.
When the second-quarter earnings results are released in July, they'll be tied to the new outstanding share count of about 1.4 billion. As for year-over-year comparisons, management will use split-adjusted figures to measure any changes.
Next, a probable boost for the stock
Companies often see a short-term uptick in their share price following a stock split due to the hype that typically accompanies a split announcement. And the more exciting the stock split, the more likely it is the stock will rise, at least initially.
Chipotle's stock split is certainly notable, and shares have already climbed about 15% since the company first announced its plans in mid-March. But there's often a pullback soon after a split-fueled rally since the gains are not tied to any real metric or performance.
With its shares up 60% in the past year alone, Chipotle trades at a price-to-earnings ratio of almost 70. That's not an unusual or outrageous multiple for the company, but it still represents a hefty premium to the broad market.
Long-term gains
Ultimately, it was years of profitable expansion under a strong management team that brought Chipotle to this historic moment.
Though the stock split itself changes little about the underlying business, Chipotle still has massive growth opportunities, including plans to double its number of locations to 7,000. Forget the stock split, and buy Chipotle stock for the right reasons, which are its steady growth, strong profitability, and robust long-term outlook.
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Jennifer Saibil 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
