When its 2023 fourth-quarter financials were released almost two months ago, Chipotle Mexican Grill (CMG 0.71%) announced results that easily beat Wall Street estimates. But in more recent times, shareholders are excited about a new development.
On March 19, the Tex-Mex restaurant chain announced a massive 50-for-1 stock split. Since then, shares have climbed about 4% (as of April 2), and they are up 27% this year. There's clearly strong investor interest in this stock right now, driving greater momentum.
Shareholders will vote on the stock split in June at the annual meeting. Does its pending approval make Chipotle a once-in-a-generation investment opportunity?
Cutting the burrito into smaller pieces
It's critical to first understand what exactly a stock split is. Typically, if a business's shares perform well, as has been the case with Chipotle, the price rises to an extremely high level. Executives want to reduce the price, so they announce a stock split. Lower nominal stock prices might be more enticing for smaller investors because they can acquire more whole shares, instead of having to buy fractional shares like some brokerages allow.
Should this get approved, every shareholder will receive 49 new shares of Chipotle stock for every single one they already own. Consequently, there will be 50 times more outstanding shares that trade at 1/50th the price.
However, at the end of the day, nothing changes with Chipotle at a fundamental level. A stock split will not change management's strategy or alter revenue and earnings trajectories.
Is Chipotle stock a buy?
Now that we've established the specifics of Chipotle's stock split, it's time to turn our attention to the question of whether or not shares make for a smart buying opportunity right now. There are some important factors that we need to consider.
There's no doubt that the company continues firing on all cylinders. Chipotle reported revenue and earnings per share growth of 14.3% and 38.4%, respectively, in 2023. These two headline figures are significantly higher than they were just five years ago. Chipotle's results maintain strong financial performance despite ongoing macroeconomic uncertainty.
Key to the company's strategy, unsurprisingly, is aggressively opening new restaurants. There are currently 3,437 Chipotle locations (as of Dec. 31, 2023), up by 250 from 12 months before. The success of the drive-through setups, known as Chipotlanes, is noteworthy. Management points out that these locations increase new restaurant sales, margins, and returns. They also help strengthen Chipotle's digital presence.
Over the long term, executives believe there can be 7,000 stores in North America, roughly double today's footprint. The hope is that these restaurants can generate $4 million in annual sales, up from $3 million in Q4. These forecasts certainly make bullish shareholders very happy.
But investors need to realize that just because a business is posting tremendous results and has bright growth prospects, it doesn't necessarily mean the stock is a no-brainer buy. Valuation is the missing ingredient that must be closely scrutinized.
After shares have skyrocketed 311% in the past five years, Chipotle is extremely expensive today. The stock trades at a dizzying price-to-earnings ratio of 65.5. Even with impressive fundamentals and a lofty store opening target, the valuation is in nosebleed territory. There is literally no margin of safety for prospective investors, as Chipotle is priced for perfection right now.
Undergoing a significant 50-for-1 stock split definitely grabs the attention of investors. However, that doesn't make Chipotle a once-in-a-generation investment opportunity. Investors shouldn't buy the stock right now. Instead, they should wait for a major pullback before even considering adding the business to their portfolios.
