Chipotle Mexican Grill (CMG 1.07%) is firing on all cylinders right now. The popular Tex-Mex fast casual chain reported revenue of $2.4 billion, up 17.2% year over year, and diluted earnings per share of $10.50, up 87.8%, in the first three months of 2023. Both figures blew past Wall Street expectations, and the stock shot up 14% on the morning of the announcement.
It's difficult to find reasons not to like this magnificent growth stock. The company continues posting outstanding results while other businesses in a range of sectors struggle with ongoing headwinds. And that means it should be on every investor's radar. Let's take a closer look.
The burritos are a great value...
During the first quarter, Chipotle's same-store sales jumped 10.9% year over year. This double-digit gain was boosted by robust demand from both lower-income and higher-income consumers.
This highlights how they view the restaurant's prices. "I don't want to walk past the fact that we continue to have tremendous value scores," CEO Brian Niccol said on the first-quarter earnings call Tuesday. He was referring to extremely positive feedback from customers about the amount and quality of the food relative to its price.
This is even more encouraging in today's economy, when inflation is still running hot. The operating margin of 15.5% last quarter demonstrated a massive expansion from 9.4% in the year-ago period. Menu prices on average were up 10%, as management tried to offset higher costs across the board.
This proven pricing power, something Warren Buffett would certainly like, has helped to significantly increase profitability, all while the generally higher-margin digital sales grew at a slower clip than in-store sales.
Chipotle opened 41 new stores during the quarter, bringing its total to 3,224 as of March 31. For the full year, management expects to open between 255 and 285 new restaurants, reiterating prior guidance. It also believes that same-store sales will rise by the mid to high single digits this year.
...but the stock is not
Chipotle stock is up an incredible 500% over the past five years. It's crushing the S&P 500 and the Nasdaq Composite by a wide margin. But despite this, investors might want to wait before buying shares.
That's because they trade at a steep price-to-earnings (P/E) ratio of 64 right now. That's much higher than the stock's trailing-12-month average valuation. And it makes Chipotle much more expensive than other top-tier restaurant stocks like Domino's Pizza and Starbucks on a P/E basis.
But investors might be able to justify the premium price tag based on Chipotle's monster success in recent years, which is impressive when you consider what has happened. A global pandemic ravaged the restaurant industry, but Chipotle found a way to thrive by leaning on its technology to strengthen its competitive positioning and continue serving hungry customers.
And more recently, while inflation not seen in four decades has been hurting consumers, Chipotle has shined thanks to its value proposition. These positive developments underscore the quality of the business.
It also has a ton of growth potential. "And this brings me to expanding access convenience with a long-term target of 7,000 restaurants in North America," Niccol said on the first-quarter earnings call. "We remain on track to grow new restaurants 8% to 10% per year for the foreseeable future."
Hitting that long-term target would more than double the chain's current physical footprint. Niccol even touched on the possibility of pushing that target up in the future, since performance for new locations has been so strong.
It's hard to deny Chipotle's financial performance and its long-term outlook. But I still think the stock is too expensive right now, providing no margin of safety to investors. As a result, it's probably best to wait for a meaningful pullback before buying shares.
