Chipotle Mexican Grill's (CMG 1.03%) high stock price may send mixed signals to investors. While the high price is a sign of success, it has also put it on stock split watch as small investors hope that the shares become more affordable.
Nonetheless, a nominal stock price actually holds much less meaning for a stock than growth, earnings, and other metrics. Investors should focus on three factors that took Chipotle stock higher before, and will likely do so in the future.
1. Its role in pioneering healthy fast food
From the beginning, Chipotle has stood out among fast food restaurants for its health-oriented food sourcing practices. It does not serve food with artificial colors, flavors, or preservatives. It also forbids the use of can openers and freezers, and has committed to responsibly raised meat with no added hormones.
A USDA study found that in the U.S., organic farming was one of the fastest-growing segments in agriculture. So it stands to reason that Chipotle's approach would appeal to consumers. Moreover, amid food inflation, Chipotle has demonstrated its pricing power as rising prices have not deterred sales.
Additionally, other companies have copied this model outside of the Mexican food category. Canada-based Freshii focuses on salads and wraps, while Tokyo Joe's seeks to emulate this concept in the Japanese food realm. Still, neither of these companies has gone public or grown to the size of Chipotle.
2. Chipotle's expansion potential
Also, with more than 3,000 restaurants, Chipotle's expansion prospects have gained significant attention. It operates in 48 U.S. states and Washington, D.C. Since nearly 99% of its locations are in the U.S., this has led to questions about its expansion.
Nonetheless, CEO Brian Niccol stated on a recent earnings call that the company could operate 7,000 locations in North America. Chipotle has noted success in "small-town" locations, which adds to its addressable market. The company expects to open between 235 and 250 restaurants in 2022 (including 10-15 relocations), so it continues to expand steadily.
Moreover, North America includes Canada. Since Canada only has 28 Chipotle restaurants, the expansion potential is significant. It has also opened 12 U.K. locations and a small number of takeout-only restaurants in France and Germany. If its concept succeeds with other cultures, the expansions will probably continue for a long time to come.
3. Continuing revenue and earnings growth
But no matter what it plans on the expansion front, few can question Chipotle's growth amid challenging conditions. Its digital ordering system became popular during the pandemic and now accounts for 39% of all food and beverage sales. And even as stores have reopened, Chipotle's pricing power has helped the company fight inflation.
For the first six months of 2022, its $4.2 billion in revenue rose 16% compared with the same timeframe in 2021. Chipotle was able to limit expense growth below the increase in revenue, allowing net income to grow 33% over this period to $418 million.
Analysts predict it can maintain the 16% revenue growth rate for the year. This may help explain why its 12-month stock performance closely matches the S&P 500's.
However, it has built a long track record of success, a factor that may explain its lofty price-to-earnings (P/E) ratio of 62. This comes in well above those of other restaurant stocks, such as McDonald's at 31 times earnings, but investors should also remember that Chipotle has rarely sold for less than 50 times earnings over the last five years. Hence, it might not be as expensive as it might appear.
Consider Chipotle stock
Admittedly, many investors probably want Chipotle to split its stock. But even if it never splits, Chipotle's healthy fast food concept is clearly a winner with consumers. As long as it can continue adding restaurants and capitalizing on its pricing power, Chipotle stock can continue rising, even with a high P/E ratio.