In the last five years, Chipotle Mexican Grill (CMG 0.28%) has seen its shares skyrocket 351% (as of Feb. 8), a gain that trounces the overall market. Consistently reporting impressive financial metrics has helped the cause.
This was the case in the latest quarter. The Tex-Mex restaurant chain reported revenue of $2.5 billion and diluted earnings per share of $10.21, both figures that were up double digits year over year and that beat Wall Street estimates.
If we look more closely at the business, it's easy to see that Chipotle has wonderful qualities that should make it a top Warren Buffett stock.
Strong consumer brand
The Oracle of Omaha loves companies that have a powerful brand presence. Berkshire Hathaway's top holdings include Apple, American Express, and Coca-Cola, all of which have incredibly valuable, globally recognized brands. Chipotle's brand might not be on this level yet, but it's certainly well-regarded in the restaurant industry.
According to Piper Sandler's fall 2023 Taking Stock With Teens survey, Chipotle was ranked as the fourth most popular restaurant among the Gen Z demographic. The only three companies ahead of it were Chick-fil-A, Starbucks, and McDonald's.
By pioneering the fast-casual category, with an intense focus on using real ingredients, Chipotle's growth has been superb. The current store count of 3,437 is 38% larger than it was five years ago, with revenue soaring 108% during the same time. This monster success has inspired many entrepreneurs trying to emulate the fast-casual model.
Focus on the customer
This seems obvious, but Chipotle's impressive growth is only possible if the business puts the customer's needs above everything else. When it comes to serving food, it's all about quality, convenience, and price. Chipotle excels at all three.
But there might not be a more important factor influencing how well Chipotle can cater to its hungry customers than the company's ongoing digital push. The rewards program, in its current format, was launched in early 2019, and it has amassed 35 million members (as of last June). From management's perspective, this provides an invaluable channel to engage with consumers and collect data that can be used to direct marketing and product strategies.
Of the 271 new stores opened in 2023, 238 were built with a Chipotlane drive-thru option. This increases accessibility and convenience for customers, while at the same time boosting company sales and profitability.
Pricing power
According to Buffett, the mark of a truly outstanding business is its ability to consistently raise prices for its customers. "If you have to have a prayer session before raising the price by a tenth of a cent, then you've got a terrible business," he once said.
For companies that sell commodity-type products, this is an issue. However, Chipotle has proven time and time again that it can continuously hike up menu prices, to offset higher food, labor, and packaging costs, and still register strong same-store sales growth.
More recently, higher menu prices resulted in the restaurant-level operating margin expanding from 23.9% in 2022 to 26.2% last year. Given the fact that only a tiny percentage of customers believe prices are unreasonable, there is more financial upside for Chipotle to keep this strategy going.
There's one major risk
Thanks to this stock being a huge winner in recent years, it's not cheap by any means. Shares trade at a price-to-earnings ratio of 59.5. The valuation indicates all the optimism investors have when it comes to this business.
Buffett does have experience investing in restaurant concepts. And I'm sure that Chipotle has caught his attention. But he prioritizes not overpaying for any of the stocks he buys. Chipotle's current valuation is something all investors should be mindful of, despite this being a wonderful company.