Chipotle Mexican Grill (CMG 2.99%), now a nearly $60 billion business, has been crushing it recently. After posting outsized gains during the depths of the coronavirus pandemic, the restaurant company saw sales jump 14% in 2022. And this year is off to a strong start as well.
As a result of the business's outstanding performance, shares are up a scorching 48% in 2023 (as of May 17), outpacing the S&P 500's 8% gain. This continues a long-standing trend of Chipotle handily beating the market and rewarding shareholders.
What does this mean for the top restaurant stock? Should investors buy, sell, or hold the popular Tex-Mex chain? Here's what you need to know.
NYSE: CMG
Key Data Points
Chipotle continues its strong momentum
Selling burritos, bowls, and tacos is a fantastic business, as Chipotle keeps proving to investors. Revenue soared 17% during the first three months of 2023 to total $2.4 billion, showing accelerated growth compared to 2022. Same-store sales, which measure revenue from locations open at least 13 months, were up 11%. As consumer behavior normalizes, it's not too surprising to see that in-restaurant sales outpaced digital orders in the quarter.
Demand clearly remains robust, but perhaps more impressive, profitability keeps improving. Chipotle's operating margin of 15.5% in Q1 was a marked expansion from 9.4% in the year-ago period. This helped diluted earnings per share surge 88% year over year. Chipotle's bottom-line figure exceeded Wall Street forecasts in 10 of the last 12 quarters, so it's no wonder the stock has done so well.
While many businesses struggle with inflationary pressures, this headwind clearly hasn't deterred Chipotle. The company has successfully implemented multiple menu price hikes with seemingly little or no negative impact on sales. What's more, food, labor, and occupancy expenses represented a smaller portion of revenue. And this has resulted in expanded margins.
For the full year, management sees Chipotle opening between 255 and 285 new locations. That's solid momentum that shareholders can appreciate, especially given the uncertain economic situation. "If there is a recession, we feel like we're really well prepared," CFO Jack Hartung mentioned on the Q1 2023 earnings call. He went on to point out that Chipotle carries no debt on its balance sheet.
Chipotle shareholders should stay put
Over the past five years, Chipotle stock has skyrocketed 366%, so it's been a wonderful investment to own. However, this monster performance that has continued into 2023 has resulted in an expensive valuation. As of this writing, shares carry a price-to-earnings multiple of 56. That's a far higher valuation than the overall market.
However, it's impossible to deny how great of a business Chipotle is. As mentioned, it has proven pricing power. And its leadership believes that because of the incredible value the company provides to customers, there is likely a lot more untapped pricing power that can be utilized in the years ahead.
Moreover, with its footprint of 3,224 total stores, Chipotle has become a well-known household name throughout the past decade. According to Piper Sandler's recent Taking Stock With Teens survey, Chipotle ranked as the third-most popular restaurant chain behind Chick-fil-A and Starbucks among Generation Z. Its focus on high-quality food at an attractive price point almost sells itself.
Chipotle's growth potential is also impressive. CEO Brian Niccol and his team see there being 7,000 locations one day in North America, more than double the current store base. And the annual sales volume per store continues to rise. This means that although Chipotle has posted phenomenal growth in the past, the future could be just as bright.
It's hard to sell a wonderful company, even though its valuation might be excessive now. And as we've seen, Chipotle has a history of exceeding analyst forecasts, which adds upside possibility. That's why I think the best course of action is to hold Chipotle stock. On the other hand, if you're looking to buy shares for the first time, it might be a good idea to wait for a better entry price.
