Chipotle Mexican Grill (CMG 2.41%) made waves this week with the announcement of its first-ever stock split. But this isn't any old stock split; it's one of the largest in market history, splitting each share into 50 pieces. It's been a long time coming; Chipotle stock has traded at a four-digit price tag for about four years, and it's gained about 175% in that time, almost tripling in price.
Let's go through the reasons Chipotle is splitting its stock, and whether or not the stock is a buy right now.
What a stock split achieves
Although stock splits have become popular for public companies when their stock price becomes very high, they don't change anything essential about the stock or the company. They just divide the same-sized pie into more and smaller pieces.
Chipotle said it decided to split its stock now to make it easier to buy, which is the usual reason. CFO Jack Hartung said, "We believe this will make our stock more accessible to employees as well as a broader range of investors." Although these days most investors can invest in stocks with high prices by buying fractional shares, a four-figure price tag can look intimidating. It can also put it out of range for individual or institutional investors that looks for specific criteria.
One reason investors might be interested in stock split stocks is that they usually indicate a company that's doing well enough for its stock to have soared and hit a high price. Investors have lots of confidence in stock-split stocks prior to any stock split announcement, and that's likely to continue. Hartung continued: "This split comes at a time when our stock is experiencing an all-time high driven by record revenues, profits, and growth."
Some high-profile stock splits that have happened over the past few years include Apple and Amazon, and Walmart recently announced one as well.
Forget the stock split; Chipotle is a great company
A stock split itself isn't a great reason to buy a stock. It's important to evaluate any company's fundamentals and not rely on a split to imply that a stock is worth buying. As Hartung pointed out, Chipotle is demonstrating incredible performance leading to record sales and profits. Even more, it's doing it at a time when many companies are feeling tremendous pressure.
Revenue increased 14.3% year over year in 2023 to $9.9 billion driven by a 7.9% increase in comparable sales. Operating margin expanded from 13.4% in 2022 to 15.8% in 2023, and earnings per share (EPS) rose 38.4% to $44.34.
But can Chipotle keep it up? It definitely seems so. It practically invented (and perfected) the fast-casual restaurant model, and earned loyal fans who love its fresh, mid-priced meals. It draws from an affluent customer base who are more resilient during tough times, and it gets more mass sales when times are better.
The company opened 271 new locations in 2023 and operated more than 3,400 restaurants as of the end of the last year. However, it sees an opportunity for 7,000 restaurants in North America. Chipotle's presence is fairly saturated in U.S. urban markets, but it's been opening new stores in suburban areas as well as international stores, specifically Canada. It recently signed its first-ever franchise agreement with a Middle Eastern operator to open stores in Dubai and Kuwait.
Should you buy before the stock split?
There's some data to back up the theory that a stock gains value right after a stock split, suggesting that it might make sense to buy before the split. But that's often near-term momentum, and it doesn't last. In the longer term, stock splits stocks gain value from performance and opportunity.
If you appreciate Chipotle's solid model and future potential, it doesn't matter when you buy Chipotle stock. It has soundly outperformed the market over its lifetime, and that's likely to continue.
