Shares of Chipotle Mexican Grill (CMG -1.34%) took a hit in after-hours trading on Tuesday, when the burrito company announced fourth-quarter revenue and earnings per share that were below analysts' average estimates for the two metrics.
The top- and bottom-line miss highlights one of the biggest concerns with investing in the fast-casual restaurant operator's stock today: valuation. If it weren't for the stock's pricey valuation, the company's double-digit revenue growth during the period would be impressive. But the stock's price-to-earnings ratio of about 51 means that investors have high expectations for sustained levels of rapid growth for years to come.
Here's a look at Chipotle's fourth-quarter results and why they may not be enough to justify the stock's current valuation.
Strong execution
Overall, Chipotle seems to be doing everything right. An 11.2% year-over-year increase in fourth-quarter revenue was driven by a 5.6% increase in comparable restaurant sales. And the company's fourth-quarter restaurant-level operating margin increased by 380 basis points to 24%. This led to earnings per share of $8.02 -- up from $4.69 in the year-ago period. Adjusted earnings per share increased 48.6% to $8.29. This margin expansion and impressive growth in earnings per share put the spotlight on the impressive operating leverage in the company's business.
During the fourth quarter, Chipotle opened 100 new restaurants, of which 90 included a drive-thru. Its drive-thru format is performing well and helps "enhance guest access and convenience, as well as increase new restaurant sales, margins, and returns," management said in Chipotle's fourth-quarter earnings release.
Management expects more robust growth during the first quarter of 2023. Impressively, Chipotle said it expected first-quarter comparable restaurant sales to increase at a rate in the high single digits. This would be an acceleration from comparable restaurant sales growth of 5.6% in Q4. Management, however, did note that same-store sales growth could decelerate in Q2 and Q3.
Valuation matters
While it's good to see the company growing, investors may need more rapid growth to appease the stock's valuation. A price-to-earnings ratio of 51 suggests investors think Chipotle is still early in its growth story. While the burrito chain's double-digit fourth-quarter top-line growth and the company's impressive operating leverage definitely make a good case for a premium valuation, shares may be already fully pricing this momentum in.
Valuation should be top of mind for investors, particularly as the U.S. economy flirts with a potential recession amid a period of rapidly rising interest rates. As the ripple effects of the Federal Reserve's economic tightening policies on the economy proliferate, there's always a risk that Chipotle's sales growth slows. This would make the stock's high valuation today even more questionable.
Sure, selling the entire position may not be the best move today -- especially if investors are sitting on large, taxable gains; further, this is a company executing very well. But it may make sense to at least take some profits following the stock's huge run-up over the last month, assuming investors have a productive way to redeploy that cash.
As far as investors who are interested in the stock, it may make sense to try to wait things out and see if it sells off further.
