Chipotle Mexican Grill (CMG 2.41%) offers customers a unique mix of fresh food and speed, and it has become a go-to fast food option for a lot of people. The brand's popularity has led to material business growth and impressive appreciation in the stock price. Are these trends that investors can count on to continue into the future?
A lot better
A lot of people view the food they get at a Chipotle restaurant as higher-quality when compared to other fast-food options. The fact that it is made fresh, right in front of you, helps a great deal with this perception. The company also goes to great lengths to highlight its focus on operating in a sustainable and healthy fashion to bolster its image. So far, the concept is a hit.
Image source: Getty Images.
That has led to a massive increase in the stock price. But before looking at the long term, it's more interesting to look at the short term. Over the trailing year, Chipotle's stock has risen by roughly 12%, which is a great deal better than the 5% loss that an S&P 500 Index ETF would have offered up. Basically, even during a weak period for the broader market, investors are still rewarding Chipotle by pushing the shares higher.
That's on trend, noting that the stock is up around 110% over the past three years and 425% over the past five years. By comparison, the S&P 500 Index was only up around 40% and 50% over those respective time spans. While there's clearly something to be said about the brand's popularity and how it would support a positive attitude on Wall Street, there's a far more important fact that investors are watching.
Bigger is better
At the start of 2017, Chipotle operated 2,250 locations. At the end of 2022, that number was nearly 3,200. This has driven a top-line increase from $3.9 billion in 2016 to $8.6 billion in 2022. Earnings have been trending higher all along the way.
CMG Revenue (Annual) data by YCharts
The ability to expand its business in this fashion is clearly dependent on its ability to resonate with customers. However, management has also, pretty clearly, been executing relatively well. That combination of these facts is what has Wall Street so excited about the company.
But what about the future? In 2023, Chipotle is expecting to open another 255 to 285 restaurants, including between 10 and 15 relocations to add drive-through lanes in locations where the company has an existing store. But there are trade-offs to be made when it comes to building new restaurants.
First, new stores can cannibalize nearby stores. This doesn't seem to be such a major issue here given the strong ongoing sales growth, but it's something that investors should monitor. At this point, the company is expecting same-store sales to be up in the high single digits in early 2023.
Second, building new stores costs money. Luckily, that's not a problem here, either, because Chipotle is a profitable company. So there's no reason to expect a growth slowdown in the near term as long as the brand continues to appeal to customers.
The long term is equally as attractive. Management has a goal of 7,000 locations over the long term with no culminating date attached to that number. Still, getting from 3,200 to 7,000 at a rate of around 300 stores a year will provide plenty of growth opportunities. That goal number isn't at all unreasonable given that Taco Bell has over 8,000 locations. While the two concepts are very different in some ways, the food is in the same category. It really does appear that Chipotle has a long runway for growth ahead.
The caveat
There is a small problem here. Chipotle's valuation is, to put it mildly, elevated. The price-to-sales ratio is 5.7, a bit higher than the five-year average of 5. The price-to-earnings ratio is 55, notably lower than the longer-term average of 84 but hardly low. And the price-to-book value ratio is nearly 21, well above the five-year average of about 16.
Investors are already pricing in a lot of good news, and value investors will probably want to avoid Chipotle shares. However, growth-oriented investors will likely still find the fast-growing company attractive given the long-term opportunity for expansion that exists. Just make sure to keep an eye on the business. If the company stumbles, even if it is just for a quarter or two, the market could quickly turn negative on the stock.
