Chipotle Mexican Grill (CMG 1.62%) has done an outstanding job growing its business over many years, in particular after facing down the pandemic with a strong digital strategy.
Its stock has moved in tandem, and although it ended 2022 almost on par with the S&P 500's 18% loss, it's showing signs of renewed life, gaining 4% over the past six months.
As for its business, it's not missing a beat, opening new restaurants and hiking prices to match the inflationary environment. As it embarks on a new year, what can we expect in 2023?
NYSE: CMG
Key Data Points
A concept that has taken off and keeps going
Chipotle Mexican Grill was one of the first operators in the fast-casual dining space, which combines the fast-food model with higher quality and better atmosphere. It's now the biggest fast-casual chain in the U.S. and has nearly 3,100 restaurants worldwide. It's the only restaurant chain of its size to own and operate all of its locations.
The company performed quite a feat at the beginning of the pandemic when it didn't post a single quarter of revenue declines even as many other restaurant chains struggled with closed dining rooms. Revenue growth in the most recent quarter remained in double-digit territory, fueled by triple-digit gains in digital orders.
Chipotle continues to enjoy double-digit sales growth that drives strong profitability. In 2022's third quarter, sales increased 13.7% year over year with a 7.6% increase in comparable-restaurant sales (comps). That's an important number, indicating that existing restaurants are engaging customers, and that not all growth is coming from new restaurants.
Earnings per share for the quarter rose 28% to $9.20. The company successfully raised prices to combat increased costs, and expenses as a percentage of revenue came in slightly lower year over year.
Since Chipotle targets a higher-income crowd, its customers haven't slowed down spending as lower-income consumers have. Even in the scenario of a further restrained 2023, the chain isn't likely to be heavily impacted.
Don't underestimate the potential of a winner
More than 3,000 stores sounds like a lot, but McDonald's (from which, incidentally, Chipotle Mexican Grill was spun off) operates 38,000 locations globally. If you can envision the chain expanding, it truly has a huge runway in global locations.
CEO Brian Niccol mentioned that Chipotle will open its first store in Calgary, Canada, in 2023 and begin to enter more small-town U.S. markets. These are North American markets it still hasn't penetrated, not to mention its global opportunity. Management has set a target of 7,000 locations long term, and that looks very achievable with years of store openings ahead.
The company plans to open 255 to 285 locations in 2023. It forecast comps growth in the mid-to-high single digits in the 2022 fourth quarter, in line with its quarterly average. That's likely to continue over the next year, along with sales growth in the teens.
Is it too expensive?
Chipotle trades at a price-to-earnings ratio of 49, which is steep for a restaurant stock and might push investors away at first glance. However, there are a few other important factors in the equation.
First, this is the cheapest valuation Chipotle has had in the past five years outside of a very short period in the 2020 crash.
CMG PE ratio; data by YCharts.
Second, not one of the 31 analysts who give a price rating for Chipotle over the next 12 months sees it going down. Every single one forecasts a gain, from a modest 3.4% up to 42.6%.
Wall Street pays attention to valuation and will often downgrade a stock when it gets too expensive. All of these analysts see room for the stock to grow over the next year, which means they see this valuation as at least fair. Companies with high growth potential will get a premium valuation.
Considering Chipotle's popularity, its ability to raise prices and still offer value to its customers, and its expansion plans, investors can view it as an opportunity and expect the stock to rise in one year from now and well beyond.
