With the stock market having a rough go in 2022, investors might be hesitant to put money to work right now. But this is the wrong mentality as there are some fine companies that deserve a closer look. Chipotle Mexican Grill (CMG 1.08%) fits the bill as a business that continues to perform well despite broad macroeconomic weakness.
But investors need to understand both the positive and negative arguments before even thinking about investing in the company. Here are two reasons to buy Chipotle stock and one reason to sell.
Reason to buy: Profitable and growing
During the five-year stretch between 2016 and 2021, Chipotle increased revenue at a compound annual growth rate (CAGR) of 14% with diluted earnings per share rising at a 97% rate. And same-store sales generated healthy gains as well, even coming in positive in pandemic-filled 2020. So it's no surprise that the stock has produced a stellar return of 402% over the past five years.
Unsurprisingly, critical to this growth was an expanding store footprint. Chipotle's store count now totals 3,090, up from just 2,505 three years ago. This year, the business will open between 235 to 250 new stores with about 270 planned for 2023. And over the very long term, management believes that Chipotle can operate 7,000 locations in North America.
Most companies that register fast growth struggle when it comes to profitability. This isn't the case with Chipotle, which has seen its operating margin expand dramatically over the years to 15.1% in the latest quarter. Reaching a greater scale over time will definitely continue to boost the bottom line.
Reason to buy: Strong consumer brand
I believe that one of Chipotle's key competitive advantages is its powerful brand. Consumers not only associate the company with pioneering the fast-casual restaurant category, but Chipotle is known for offering up massive burritos and bowls with high-quality ingredients at a remarkable value to the customer.
Chipotle benefits from frequent purchasing behavior by its customer base. This is important because it adds predictability and stability to the business model, compared to a company that sells durable goods that customers might buy once every few years. Starbucks dominates in this regard as coffee is something that people buy daily. Burritos aren't too far behind, as Chipotle has discovered.
Boosting the brand over the past few years has been Chipotle's successful loyalty program. Since launching in March 2019, the business has amassed an incredible 30 million rewards members on the platform. This innovative and no-brainer program allows management to glean insights from the massive amount of data being collected. This can not only inform new menu introductions, but can also be an invaluable communication channel with Chipotle's most important customers.
Reason to sell: Shares are expensive
Despite Chipotle's track record of outstanding growth and profitability, coupled with a strong consumer brand, there is one very important reason that investors should hold off on buying the stock right now: valuation. Shares are currently trading at a steep price-to-earnings (P/E) ratio of 48. While that's well below the trailing 10-year average of 81, it is still expensive, even considering Chipotle's bright outlook over the next several years. The shares are also far pricier than the S&P 500 index's average P/E of 18.
If we look at the price-to-sales (P/S) metric, it doesn't paint a better picture. Chipotle's stock currently has a P/S ratio of 4.6, higher than other fast-growing restaurant peers like Sweetgreen and Shake Shack. This valuation for Chipotle certainly prices in a lot of optimism surrounding the trajectory of the business.
Before buying, investors should continue following the company and its stock until there is a major pullback, then reevaluate the stock's overall performance.
