What happened
Shares of Chipotle (CMG 1.67%) were rising this week, according to data from S&P Global Market Intelligence. The fast-casual Mexican food chain posted strong profit margins and sales growth in the first quarter of 2023, leading investors to bid up the shares to an all-time high. As of 10:19 a.m. ET on Friday, shares of Chipotle are up 13.8% this week.
So what
In Q1, Chipotle's revenue came in at $2.37 billion, up 17.2% year over year. Earnings per share (EPS) came in at $10.50, up a significant 84.2% year over year. Both numbers beat Wall Street estimates heading into the report. These impressive numbers were driven by strong same-store sales growth of 10.9% and operating margins expanding to 15.5%, compared to just 9.4% a year prior.
NYSE: CMG
Key Data Points
Chipotle is not rapidly growing the number of customers visiting its stores, but it is showing impressive pricing power during this period of high inflation. For example, average menu prices are up roughly 10% from a year prior, according to management. With new stores consistently opening and order volumes steady, Chipotle is able to grow its sales at a healthy double-digit rate with increasing profit margins.
These expanding margins have Wall Street excited about Chipotle's future, driving shares up to a new all-time high this week. Since going public in the mid-2000s, Chipotle shares are now up 4,560%, making it one of the best-performing stocks of the last few decades.
Now what
So will the party continue for Chipotle shareholders? I would say over the long term, probably, but in the short term, the stock looks expensive. Shares trade at a price-to-earnings ratio (P/E) of 55, more than double the S&P 500's average of just over 20.
Clearly, Chipotle has shown an ability to grow its earnings at a fast pace, but a P/E that's double the market average is putting high expectations for the company's financial performance and creates risk for the stock in the near term if the company faces operational hiccups.
There's no reason to sell your Chipotle shares just because the stock popped 10% (instead, hold on for those long-term gains). But now might not be the best time to take a new position, given the stock's expensive earnings ratio.
