Shares of Chipotle Mexican Grill (CMG 0.19%) have surged about 10% since the company delivered its fourth-quarter and full-year earnings report after the market closed Tuesday. Investors were cheered that the fast-casual Mexican restaurant chain beat revenue and earnings estimates.
However, the restaurant stock is still down by around 20% from its November high. With the stock price apparently beginning to recover, is now the time to buy?
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Weighing the Q4 and 2021 results
The company reported revenue of $7.5 billion for the year, a 26% increase compared to 2020. Adjusted net income surged higher by 138% to $725 million as the company limited operating expense growth to 18%.
In Q4, its year-over-year revenue growth slowed modestly to 22%, lifting the top line to $2 billion, while adjusted net income rose 61% to $159 million. This growth occurred despite inflationary pressures. In the quarter, the company's operating expenses increased by just over 20% due to higher costs for both food and labor -- expenses it compensated for by raising its menu prices.
Still, Chipotle could face challenges in the near term. In Q1, the company expects revenue growth will decelerate further to a percentage in the mid to high single digits. The company blamed the omicron variant COVID-19 wave for its slowing revenue growth.
The state of the chain
Chipotle has been one of the best-performing restaurant chains in recent years. Thanks to its established reputation for take-out orders, it was comparatively easy for the company to adapt to lockdowns when governments imposed pandemic restrictions. With only minimal closures, it was one of the few restaurant chains to increase its revenue in 2020.
Moreover, it continues to open new locations, both domestically and abroad. In 2021, the company added 215 new restaurants, 78 of them in the last three months of the year. Management has reported particular success with opening stores in small towns. It now believes that the U.S. market could sustain 7,000 Chipotle locations, up from its previous estimate of 6,000. It operated 2,966 locations as of the end of 2021.
The pandemic also appears to have made consumers more comfortable with its online platform. Only around 18% of revenues came from digital orders in 2019. That share increased to almost 61% by Q2 2020. Now, many customers have returned to in-store ordering as pandemic-related concerns have receded, but digital sales still accounted for more than 42% of revenues in the most recent quarter and 46% of sales for all of 2021.
The state of Chipotle stock
Thanks to its post-earnings surge, Chipotle stock has moved into positive territory compared to where it traded a year ago. Prior to the earnings release, the stock had been down by 3% over the prior 12 months. This is noteworthy considering that Chipotle stock handily beat the S&P 500 over the previous five years.
That past growth may add to the appeal of the stock. Its price-to-earnings ratio stands at around 65, its lowest level since the beginning of the pandemic. Most fast-casual chains are not publicly traded companies. Still, Chipotle stock carries a much higher valuation than restaurant stocks such as El Pollo Loco or McDonald's, a fact that may discourage investors from buying it on the dip.
Should I consider Chipotle?
Though it is comparatively expensive from a valuation standpoint, investors may still want to consider Chipotle stock. The forecast for slowing growth may be concerning, but as the threat of COVID-19 recedes and as Americans adapt to the virus as an endemic issue, it will likely affect Chipotle less. Moreover, since the price-to-earnings ratio is near its lowest level in almost two years, the stock has the potential to generate spicy returns from here.
