Chipotle Mexican Grill (NYSE:CMG) has been on a roll since Taco Bell veteran Brian Niccol took over for Chipotle founder Steve Ells as CEO in early 2018. Chipotle continued its remarkable run of success last quarter, posting double-digit comparable restaurant sales growth for a second consecutive quarter. Earnings soared on a year-over-year basis, too.

However, whereas investors have pushed Chipotle stock ever higher for most of Niccol's tenure -- causing the stock to nearly double just in the past year -- they didn't celebrate Chipotle's latest earnings triumph. In fact, Chipotle stock dropped 5% on Wednesday, the day following its earnings report.

CMG Chart

Chipotle Mexican Grill Stock Performance, data by YCharts.

Let's take a look at why Chipotle stock may have fallen despite what appeared to be an excellent earnings report -- and whether this share price decline represents a good buying opportunity.

Another quarter of excellent sales growth

Sales trends accelerated again at Chipotle last quarter. Comp sales surged 11%, building on increases of 9.9% and 10% in the first and second quarters, respectively. Higher transaction counts drove about two-thirds of this comp sales gain, with price increases and a shift toward larger orders accounting for the rest.

Late in the quarter, Chipotle added carne asada to its menu as a limited-time option. Management said that sales trends accelerated at the time of the carne asada launch, as the new item drove a surge in visits by both new customers and loyal Chipotle fans. The higher price point for carne asada ($0.50 more than Chipotle's traditional steak offering) also contributed to the acceleration in sales.

Meanwhile, Chipotle grew its global restaurant base to 2,546 units by the end of the quarter, up from 2,463 a year earlier. Together, the company's comp sales growth and its continuing expansion drove a 14.6% increase in revenue to $1.4 billion, matching analysts' expectations.

The interior of a Chipotle restaurant.

Chipotle's comp sales growth accelerated yet again last quarter. Image source: Chipotle Mexican Grill.

Adjusted EPS surges -- but there's a caveat

Chipotle's excellent sales growth last quarter enabled the company to again expand its margins. Restaurant-level operating margin reached 20.8%, up from 18.7% a year earlier. Adjusted pre-tax margin also rose by a little more than 2 percentage points, reaching 9.4% (up from 7.1% in Q3 2018). This margin expansion contributed to a 77% surge in adjusted earnings per share, which hit $3.82, beating the average analyst estimate of $3.22.

That said, volume-driven margin expansion wasn't the only factor powering Chipotle's stellar EPS growth last quarter. The company also noted that its effective tax rate for the quarter was about 18%, compared to the company's full-year guidance range of 26% to 29%. With a normalized tax rate, adjusted EPS would have come in between $3.32 and $3.46 -- much closer to what analysts had been expecting.

Chipotle also incurred an unusually high effective tax rate in the third quarter of 2018. This change in tax rates accounted for about a third of Chipotle's 77% increase in adjusted EPS last quarter. That still leaves an impressive amount of underlying earnings growth. However, investors understandably had extremely high expectations, given that Chipotle stock was trading for about 60 times earnings prior to the Q3 earnings release.

How long will Chipotle's momentum last?

While Chipotle has made huge strides over the past year or so, its profit margin is still nowhere near the peak levels reached back in 2015. In fact, the company's adjusted operating profit last quarter was 45% below its Q3 2015 level, even though Chipotle has expanded its restaurant count more than 30% over the past four years.

The pace and extent of any margin recovery will depend on the company's comp sales growth in the coming years. On the plus side, Chipotle has plenty of menu innovation in the pipeline, is just scratching the surface with its loyalty program rollout, and is investing in "Chipotlane" drive-thru windows in many of its new restaurants. All of these factors should bolster future comp sales growth. On the other hand, not every new menu item will be a huge hit like carne asada, year-over-year comparisons are about to get a lot harder, and most existing Chipotle restaurants can't be retrofitted with a Chipotlane.

If Chipotle can keep comp sales growing at a double-digit rate, its pre-tax margin could rise to within striking distance of its all-time high over the next five years or so. However, if comp sales growth cools to a still-solid mid- to high-single-digit pace, there would be much less margin expansion, due to rapid labor cost inflation.

The fast-casual pioneer's 14% sales growth is not sufficient to justify Chipotle stock's sky-high valuation. The company needs a lot of margin expansion in the next few years to keep the stock moving higher. It's certainly possible that Chipotle's sales initiatives will keep comp sales rising at a double-digit rate for many quarters to come. However, it's far from guaranteed, making Chipotle stock too risky to be worth buying at its current valuation.