Chipotle Mexican Grill (CMG -0.66%), down just over 10% in 2022, has fared better than the overall market as the S&P 500 has fallen 18% so far this year. The popular Tex-Mex chain known for its massive burritos continues reporting solid results amid a softening macroeconomic backdrop, which could help explain why the stock is holding up reasonably well.
As we look toward 2023, is this top restaurant stock a no-brainer addition to your portfolio? Let's take a closer look at what investors need to know.
Navigating a difficult economy
Like many businesses out there, especially retail-based ones, Chipotle hasn't been immune to the surge in inflation and weaker consumer spending. The company has had to deal with rising costs for things like beef, avocados, and packaging materials, and this has pressured margins. However, to Chipotle's credit, management has been able to successfully implement price increases four times over the past 16 or so months, the most recent being in October. And the company's third-quarter operating margin of 15.1% was higher than 12.3% in the year-ago period.
Throughout the first nine months of 2022, Chipotle's revenue totaled $6.5 billion, up about 16% from the first nine months of 2021. And net income increased an astounding 30%. At a time when many businesses are facing higher costs and sales slowdowns, Chipotle looks to be doing just fine.
However, an economic downturn could certainly have a negative impact on the business should this be the case in 2023. CEO Brian Niccol described how his team is viewing the situation on the Q3 2022 earnings call.
"Look, I mean what we've really spent a bunch of time on is looking at what happened in the last kind of recession or slowdowns," he said. "And the good news for us is, yes, you had some low-income consumers step away, but we also had higher-income consumers trade into our business."
Being a top fast-casual food choice for customers of all household incomes means Chipotle is poised to continue doing well, regardless of the economic picture. Serving high-quality food with real ingredients at an incredible value point to Chipotle being in an enviable spot among consumers.
I think Chipotle is a fantastic company, as proven by its solid historical growth, profitability, and strong brand. But there is one thing that gives me pause when it comes to buying the stock, and that's the current valuation.
Touching on valuation
As of Nov. 16, Chipotle's shares sell at a price-to-earnings (P/E) ratio of 53. That's substantially below the trailing-five-year average of 83, but it's far more expensive than where other well-known restaurant stocks like McDonald's and Yum! Brands currently trade.
Wall Street analyst estimates call for Chipotle to generate revenue of $9.9 billion (up 13.6%) and earnings per share of $42.92 (up 28.5%), respectively, in 2023. Both figures would be sizable gains compared to what the business is expected to do for the current year. Also, management plans to open 255 to 285 new stores next year, up from 235 to 250 in 2022.
Over the long term, Chipotle sees the potential for having 7,000 total locations in North America, which would be more than double the current footprint of 3,090. At this scale, sales and profits will be substantially higher, potentially paving the way for a much higher stock price as well.
This target also doesn't include other geographies, particularly in Europe. Right now, Chipotle has 13 stores in the United Kingdom. If these perform up to management's standards, then it's not a stretch to think that the business could open many more restaurants across the country and the continent. And this would certainly boost revenue and earnings even more over the long term.
Nonetheless, I think the stock looks overvalued today. And investors should wait for a meaningful pullback in 2023 before buying shares.