The best businesses for investors to own in the long run are those that have earned die-hard followings from their customers. This is because loyal customers are repeat customers, which fuels all-around business growth.
Chipotle Mexican Grill (CMG 2.41%) has built a cult-like following over the years. This is why a modest $1,000 investment in the stock when it went public in 2006 would have grown to a staggering $47,000 -- a blistering 25.5% compound annual growth rate.
If you missed out on these remarkable gains, the good news is that there could still be strong upside in the years ahead. Let's dive into the company's fundamentals and valuation to find out how this could be possible.
A respectable quarter
It's not exactly controversial to argue that Mexican food is a go-to ethnic cuisine among many consumers. The likes of Chipotle, Yum Brands' Taco Bell, and Qdoba Mexican Eats prove this to be a fact. Time after time, Chipotle has utilized its reputation for fresh ingredients and quality customer service to capitalize on this popularity. This was once again the case in the second quarter ended June 30.
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Total Restaurants | 3,052 | 3,268 |
| Comparable Restaurant Sales Growth Rate (YOY) | 10.1% | 7.4% |
| Net Margin | 11.9% | 14% |
Data source: Chipotle. YOY = year over year.
Chipotle's total revenue jumped 13.6% year over year to $2.5 billion during the second quarter. This was mostly fueled by high-single-digit growth in its comparable restaurant sales, which came in just below the analyst consensus of 7.7% for the quarter. Chipotle's decent comparable sales growth was due to a combination of a 4%-plus increase in traffic and a roughly-5.5% bump in menu prices in the quarter.
Traffic was arguably strong because of the sequential growth in the company's loyalty program from 33 million in Q1 to 35 million in Q2.
These tailwinds were partially offset by a 2.5% headwind, the result of a slight reduction in group size as more consumers return from at-home work to the office. Paired with growth in the company's restaurant count over the year-ago period, this explains Chipotle's robust top-line growth.
The Newport Beach, California-based company's non-GAAP (adjusted) diluted earnings per share (EPS) vaulted 36% higher over the year-ago period to $12.65 during the second quarter. Chipotle's smart cost management helped keep its operating expenses in check, rising just 10.5% for the quarter. This propelled the company's non-GAAP net margin higher in the period. Coupled with a reduction in its diluted share count, this is how Chipotle's adjusted diluted EPS growth outpaced revenue growth during the quarter.
Image source: Getty Images.
Significant growth could continue for a while longer
All in all, Chipotle had a solid quarter. And it looks poised to string together many more great quarters in the years ahead. Considering that the second quarter was the third consecutive quarter that the company didn't close a single restaurant, it seems like the company is a long way from reaching saturation.
This makes Chipotle's long-term target of 7,000 North American locations seem to be a reasonable goal, which is more than double its current restaurant count for the continent.
Alongside its growth ambitions in Europe, and more recently Asia, the company is arguably just getting started. That is why analysts believe Chipotle's adjusted diluted EPS will increase by 25.2% annually for the next five years -- much better than the restaurants industry average of 14.4%.
Buying the dip could be a brilliant move
Since the release of Chipotle's earnings and the slight disappointment in comparable restaurant sales growth, the market has sent its shares nearly 10% lower. This looks to be a gift from the market, which has pushed the stock's forward price-to-earnings (P/E) ratio down to 35.2. Compared to the restaurant industry average forward P/E ratio of 24.7, this could be a great entry point for growth investors with at least a five-year investment horizon.
