Wall Street has an appetite for Chipotle Mexican Grill (CMG 2.41%) stock again. While the S&P 500 has declined in recent weeks, the casual dining specialist is on a tear. Shares are up nearly 40% so far in 2023 compared to a 7% uptick in the wider market.
A lot of that enthusiasm can be traced to Chipotle's strong third-quarter earnings report, which showed improving demand trends and rising profit margins in a rocky economic environment for consumer spending. Let's take a look at some fresh reasons to like the stock following that announcement.
1. Winning with diners
Chipotle is having no trouble attracting more diners. Comparable-store sales were up 5% in the Q3 period that ran through late September. Management credited better hiring and training practices, food quality, and faster service for that success. "Chipotle's value proposition ... is stronger than ever," CEO Brian Niccol said in a press release.
That value proposition translated into higher customer traffic, which has been hard to come by for many restaurant peers lately. Still, McDonald's is expanding at a faster rate as many shoppers prioritize value. The fast-food giant's comps were up 8% in the U.S. market this past quarter. Yet, it is clearly good news for Chipotle shareholders that the company is maintaining its positive momentum through this rocky selling environment.
2. Boosting profits
Chipotle doesn't use a franchised operating model, and so its profit margins aren't nearly as high as McDonald's. However, the news is still positive around its earnings trends.
CMG Operating Margin (TTM) data by YCharts
Chipotle's restaurant-level operating profit margin improved to 26% of sales from 25% a year ago. Overall profitability rose to a healthy 16% of sales from 15%, too. This translated into a 20% spike in adjusted earnings this quarter.
These impressive gains came despite some headwinds, such as food cost inflation and higher wages. The good news is that these cost pressures should ease up over the next few quarters, which potentially could boost annual earnings into 2024.
3. The price is right
The biggest risk for investors, then, is overpaying for this high-performing stock. That's a potential issue given Chipotle's rally so far in 2023. Shares are valued at 47 times earnings, which seems high compared to McDonald's P/E ratio of 24. Yet that valuation isn't nearly the highest that investors have been paying for Chipotle this year. The shares are also relatively inexpensive on a price-to-sales (P/S) basis, too. You can own the Tex-Mex specialist for less than 6 times annual sales compared to McDonald's P/S ratio of nearly 8.
That's an attractive deal for a business that's winning market share and boosting profit margins in a high-cost environment. It's always possible that consumer spending patterns will slow further over the coming quarters, especially if a recession develops. But Chipotle's focus on value gives the business flexibility to continue growing its earnings through a wide range of selling conditions.
Investors shouldn't ignore that success and instead can consider putting this restaurant specialist in their portfolio today, with an eye toward holding the stock for many years.
