In 2006, shares of Chipotle Mexican Grill (NYSE:CMG) closed their first day of trading at $44. Now those shares are worth over $934 -- up more than 21 times their initial value. It's probably safe to say that Chipotle stock has already minted some millionaires over the last 14 years.
Having already returned so much, could Chipotle stock still be a millionaire maker for investors today? That may come down to its use of future cash flows.
How much cash are we talking about?
Weeks before going public, Chipotle had a mere $61,000 on its balance sheet. Today, it has over $500 million in cash and equivalents. The company banked this cash pile by means of a profitable restaurant expansion plan. At the end of 2005, there were only 489 Chipotle locations; today there are 2,638, all company-owned. Despite the higher up-front cost of an exclusively company-owned model and the speed of its expansion, it's been a profitable business every year since becoming a public company.
Chipotle's average annual sales per restaurant, known as average unit volumes (AUV), are high. For 2019, its AUV was $2.2 million. High volume leverages fixed costs like real estate and labor to drive strong cash flows. In 2019, net cash from operations came in at $722 million, up 16% from 2018.
But that annual cash flow needs to be allocated well if Chipotle stock is going to make new millionaires.
What's it doing now?
Even though this cash-generation machine is humming, Chipotle isn't paying a dividend (one common capital allocation option) anytime soon. That's because it prefers to use cash to invest liberally in organic growth. The primary growth engine is still new restaurant locations. The company opened 140 new locations in 2019, and that annual number is guided to increase over time (although much of restaurant development is temporarily paused because of the coronavirus pandemic).
How many U.S. Chipotle locations could there be long term? Management hasn't said, but since openings are expected to increase in the coming years, it's safe to assume there will be far more than 3,000. And because restaurants are profitable, it's a good use of cash.
Chipotle's management also wants to remodel existing restaurants, but not with simple cosmetic upgrades. Rather, remodels are designed to increase AUV, another fantastic use of cash. Remodeled locations will include pickup shelves and Chipotlanes, enabling more diners to be served from each location.
And the COVID-19 pandemic is giving consumers a nudge toward this Chipotle model of the future. Most restaurants are only doing to-go orders right now, and that's aided by digital ordering. Right now digital orders are about 70% of Chipotle's business, an all-time high. And comparable-store sales from April are only down by a high-teens percentage.
Put another way, Chipotle just proved it's capable of generating more than 80% of its revenue without any dining rooms, and with 100 locations closed entirely. It's a show of strength, and an encouraging sign as the company attempts to increase AUV by improving off-premise capabilities.
A future unseen
I don't know when, but someday the Chipotle Mexican Grill brand will reach maturity. Between now and then, I'm betting the stock can beat the market. I don't expect millionaire-maker returns, but it'll still reward shareholders.
When it reaches maturity, those thousands of Chipotle locations should still generate tons of cash. Speaking in broad business terms, companies have a few good capital-allocation options: Build something new, acquire another business, or pay a dividend.
We've seen Chipotle fail at the build-something-new option before. Between ShopHouse Southeast Asian Kitchen, Pizzeria Locale, and Tasty Made, it just hasn't been able to catch lightning in a bottle a second time. That said, Chipotle's management is a good restaurant operating team, and logically that experience could be leveraged with another restaurant concept offering attractive financial potential.
To me, this is the better option for Chipotle. While a dividend would be nice, it wouldn't grow the business. But creating something new or making a smart acquisition would. Despite past failures, perhaps the company will succeed once the Chipotle brand reaches maturity. After all, a mature Chipotle chain allows for a better focus on a new restaurant concept.
For now, though, it's far too speculative. Yet I believe there's something here for investors. From what I can see, I'm betting Chipotle Mexican Grill will beat the market for the next three to five years. But winners often find new success avenues when the time comes, and sometimes it's a thing investors never thought of.
I might not dub Chipotle stock a millionaire maker today. Those are rare. But I think this growth stock is worth buying and could prove me wrong on its millionaire-maker status for those willing to hold long term.