With the stock down 28% from its 52-week high and deep into correction territory, shares of Chipotle Mexican Grill (CMG 2.41%) may seem tempting at these levels. But even after the sell-off, Chipotle is trading at 57 times earnings, which is a huge premium to the restaurant sector and the broad market as a whole. Still priced for perfection and with headwinds swirling around it, the road ahead looks far from perfect.
Don't get me wrong; I'm a fan of Chipotle and have owned the stock in the past. The business deserves a premium valuation based on the growth and innovation it has shown over the years, but the stock isn't a buy for the foreseeable future.
Image source: Getty Images.
More expensive than FAANG stocks
Other industry-leading restaurant stocks like McDonald's and Wendy's look expensive trading at over 25 times trailing earnings, but Chipotle's multiple is twice as high. That means it trades at a premium even to cutting-edge technology companies, including all five FAANG stocks.
Data by YCharts.
Additionally, while stocks in the restaurant sector are often known for their dividends, Chipotle does not pay a quarterly distribution.
Challenging environment
Right now, Chipotle is facing challenges on multiple fronts, including wage inflation and rising input costs for things like beef, chicken, and corn. Fast-food and fast-casual restaurants are having a hard time attracting workers, and they must increase pay to staff their locations (Chipotle announced plans to average $15 per hour for its employees last year). That's a good thing for workers, but it will take a bite out of Chipotle's bottom line.
Beyond the pressure on profitability, inadequate staffing can create problems for the top line if patrons go elsewhere due to long waits. In fairness to Chipotle, the company has done a great job with its digital experience. This can help mitigate the fallout from understaffed restaurants, but even with the digital channel making up about 43% of total sales, most customers aren't using an app to order. On the most recent earnings call, CEO Brian Nichols made the case that Chipotle is navigating these issues well before conceding, "[A]t the end of the day, I wish all our restaurants were fully staffed, and I know we're missing sales because not all of them are fully staffed."
As if this weren't enough of a challenge, Chipotle also has to deal with surging commodity prices. Beef prices, for example, increased 20% between Oct. 2020 and Oct. 2021, according to the Bureau of Labor Statistics. Chipotle can pass some of its rising costs on to consumers, and it has raised prices at least three times already since the beginning of the pandemic. But at some point, higher prices will have an adverse effect on demand. The New York Times recently ran an article -- "How Much Are You Willing to Pay for a Burrito?" -- which centered largely around price hikes from Chipotle and other major restaurant companies, illustrating how much this issue is entering the daily conversation for society as a whole.
Supply chain issues are another complication that Chipotle and its peers must grapple with. In my own experience, I have recently dined at Chipotle locations that were out of basic ingredients like chicken. On the earnings call, CFO John Hartung noted, "The freight [cost] is astronomically high and the ability to get the supply we need is very, very challenging, so we want to see how that normalizes. There [are] materially shortages not just with our food and paper but also with our openings as well." I don't want to pick on Chipotle here as these are major, worldwide issues affecting the entire economy, but given the steep valuation premium for this business, I don't feel these various headwinds are adequately priced into the stock.
Can't press the buy button here
Looking back, Chipotle has been a great stock for long-term investors, and it makes for a great business-school case study on building a successful restaurant chain at breakneck speed. CEO Brian Niccol and his team have done a great job adapting the business through the pandemic too. But the market is forward-looking, and I can't call Chipotle a buy right now with the myriad of headwinds it faces, especially when it trades at nearly 60 times earnings.
Even if the company does everything right, its future upside is limited when comparing its valuation to other restaurant stocks and the market as a whole.
