Chipotle Mexican Grill (CMG 2.25%) saw its shares end 2022 down nearly 21%, underperforming the broader S&P 500 index, which was down about 18% on the year. You can't tell by looking at the stock performance, but the popular restaurant chain continues to post solid financial results and still has tons of growth potential in the years ahead.
Does this make Chipotle a smart buy right now? Let's take a closer look to find the answer.
Recent results
In its 2022 third quarter (ended Sept. 30), Chipotle generated revenue of $2.2 billion, good for a 13.7% increase from the prior-year period. Same-store sales, which measure comparable revenue for stores open at least 13 months, jumped 7.6%. And diluted earnings per share increased 28.1% compared to Q3 2021. These are solid results, especially when you consider how much growth Chipotle exhibited in 2021.
Despite macroeconomic concerns -- namely high inflation and the potential effect of rising interest rates -- Chipotle's business seems to be doing just fine. Perhaps unsurprisingly, costs for key food inputs like beef and avocados have gone up. But Chipotle has proven its pricing power, having raised menu prices several times over the past year and a half, with sales still rising at a solid clip.
"While it is difficult to predict the macro impact on future spending trends, we know our value proposition remains strong and we experienced minimal resistance to our price increase in the quarter," CEO Brian Niccol pointed out during the Q3 2022 earnings call.
Inflationary pressures haven't hurt Chipotle's profitability, either. In the third quarter, the operating margin expanded 280 basis points to 15.1%, which is a superb figure for a restaurant business. Chipotle has been a wonderful case study of a company that has grown its top line rapidly without sacrificing what ultimately matters most: Profits.
Long-term opportunity
While the business currently has 3,090 stores (as of Sept. 30), and planned to end 2022 having opened 235 to 250 new locations in the year, Chipotle still possesses a massive expansionary runway if we look toward the next decade.
"Supporting, developing, and growing our people will remain a core focus for Chipotle and is key to growing to 7,000 restaurants," said Niccol.
Chipotle's objective is to more than double its current footprint, and this figure only considers North America. Right now, there are 13 locations in the U.K., all clustered near London. Imagine if the fast-casual, Tex-Mex concept takes off in other major metropolises in Europe. That target of 7,000 stores would certainly need to be raised.
Many of the new stores the business plans to open will come equipped with a drive-through option, called a Chipotlane. These stores let hungry customers order via digital channels for a convenient pick-up option. It allows Chipotle to boost sales volume per store, while producing higher margins because these customers don't dine in. As more locations in the footprint have Chipotlanes, and more customers order digitally, overall revenue will trend even higher over time.
Steep valuation
Chipotle is undoubtedly a wonderful enterprise, as its stellar financials, growth, pricing power, and brand demonstrate. So it's no surprise that the stock has followed suit, rising 347% over the past five years despite a drop of about 20% since mid-September. For comparison's sake, the S&P 500 produced a total return of just 54% over the trailing five-year period.
As a result, Chipotle currently trades at a price-to-earnings ratio of 48. This valuation is expensive even when considering the company's outstanding growth potential. For investors focused more on the value side of the equation, buying shares today is probably off the table. But for those who care primarily about growth, Chipotle might deserve a closer look right now.
In my opinion, the best thing investors can do right now is simply wait for Chipotle's price to pull back meaningfully before adding it to their portfolios.
