Several companies, including Amazon, have recently made news by announcing a stock split. Businesses typically execute the move with a nominally high stock price. Amazon's stock was roughly $3,000 when it announced its stock split.
In that regard, Chipotle (CMG -1.34%) looks like a stock-split candidate. With its share price of $1,418 as of this writing, it can be out of reach for some retail investors (unless they utilize fractional share buying).
However, just because a company could announce a stock split is not reason enough to buy. Let's look closer at Chipotle's prospects and its valuation to determine if long-term investors should buy the stock.
Chipotle has excellent growth prospects
Interestingly, Chipotle is a more robust business than before the pandemic's onset. That's because it was forced to shut its doors to in-person diners, which initially hurt sales. However, management adapted well, emphasizing the digital business, and online orders for delivery and pick-up thrived. As a result, revenue increased by 26.1% for Chipotle in 2021. That was its highest growth rate since the company boosted sales by 27.8% in 2014.
Impressively, the rise in sales flowed to profitability, and Chipotle's $824 million in operating income for 2021 was the highest in the past decade. Further, its earnings per share of $22.90 in 2021 were nearly double the next highest in that same timeframe. The excellent performance gave management the confidence to raise long-term targets for the business.
First, Chipotle increased its target average unit volume (which measures how much sales are produced at each restaurant) from $2.5 million to $3 million annually. It has also boosted to 7,000 (from 6,000) the total number of restaurants it believes it can sustain eventually. Chipotle had 3,014 restaurants as of March 31 and plans to build between 200 and 300 locations per year.
That's all excellent news, but the company is not without challenges. The coronavirus pandemic is continuing to disrupt supply chains worldwide, creating shortages and raising prices. The inflationary pressure is hitting Chipotle. Costs for food, beverage, and packaging increased by 31% in its most recent quarter ended March 31. Similarly, labor expenses rose by 26.3%. This trend can eat into Chipotle's profit margins and decrease earnings over the next several years.
Image source: Getty Images.
Chipotle's stock is too expensive
Moreover, Chipotle's stock is the most expensive among its peers, including McDonald's, Dominos Pizza, and Starbucks. Indeed, Chipotle is more than twice as expensive as any of the other stocks aforementioned when measuring by either the price-to-free cash flow or price-to-earnings multiple. Admittedly, Chipotle may have better growth prospects than any of the peers mentioned, but not enough to justify more than twice the valuation.
CMG Price to Free Cash Flow data by YCharts
Overall, while Chipotle is an excellent business with solid prospects in the long run, the stock is too expensive to buy right now. Regardless of its stock-split potential, investors would be better-served to wait for a pullback in the share price before starting or adding to a position.
