While many restaurants struggled to get by during the pandemic, Chipotle Mexican Grill (CMG 2.97%) absolutely thrived, expanding its store footprint and increasing revenue and net income. But 2022 wasn't a great year for the stock, as it lost 21% of its value during the 12-month stretch. Investors are hoping that even in the face of a softer macroeconomic environment, shares will bounce back this year.
Is Chipotle poised to significantly reward shareholders? Continue reading to find out if the stock can hit the $2,000 mark in 2023.
NYSE: CMG
Key Data Points
What needs to happen
Based on its recent price (as of Jan. 23) of $1,570, if Chipotle hits $2,000 by the end of the year, that would be an outstanding gain of 27%. This would easily crush the S&P 500's historical average annual return of 10%, but it would lag Chipotle's trailing-five-year average annual return of 37%. Nonetheless, that kind of performance would certainly please investors.
But right now, the stock trades at a hefty price-to-earnings (P/E) ratio of 55. This is a more expensive valuation than other dominant restaurant brands like Domino's Pizza and Starbucks. It's not a surprise that shareholders remain optimistic about Chipotle's prospects, given its strong growth and profitability in recent quarters.
I don't think anyone can predict with any level of certainty where a stock's valuation multiple will be in a year, so for the purposes of this discussion, let's just say that Chipotle will have the same P/E of 48 that it had at the start of 2023 by the end of 2023. This means that in order for the stock to hit $2,000, earnings per share (EPS) must rise 46% between 2022 and 2023.
Management won't provide much guidance, but Wall Street consensus analyst estimates call for EPS to increase 31.8% in 2023. Clearly, this wouldn't be enough to propel the stock to $2,000 if the P/E ratio stays the same. However, over the past seven quarters, the business exceeded analyst estimates with this metric, so another showing like this would definitely surprise investors to the upside.
It's not out of the question
Another obvious development that can help take Chipotle's stock to $2,000 is the P/E ratio expanding. It's at 55 at this writing, which is elevated to be sure, but it's far lower than the five-year average of 82. Investor optimism about the company could rise throughout the course of this year, which would push the valuation higher.
Chipotle's business continues to dominate, despite the fact that many experts are predicting a recession sometime in 2023. In the most recent quarter (the third quarter of 2022, ended Sept. 30, 2022), revenue and diluted EPS increased 13.7% and 28.1%, respectively, versus the prior-year period. Same-store sales jumped 7.6%, and Chipotle opened 43 new stores during the three-month period. This is a business that isn't pumping the brakes when it comes to growth.
Another sign pointing to how Chipotle is firing on all cylinders is its proven pricing power. In the face of rising costs for food and paper supplies, management increased menu prices numerous times over the past year and a half, with seemingly minimal pushback from consumers. And this helps to explain why the operating margin was up so much, from 12.3% in Q3 2021 to 15.1% in the latest quarter.
"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 said on the Q3 2022 earnings call.
Based on the company's strong fundamental performance, it's not out of the question for the stock to reach $2,000 by the end of this year. It's all about outpacing investor expectations and continuing to post solid financial results. However, it's almost impossible to know exactly where the stock is headed next, so the best thing investors can do is to look at any prospective investment with a long-term mindset.
