A lot of people seem to care about stock splits, so much so that we even have a dedicated calendar for them at The Motley Fool. A huge split is coming up for Chipotle Mexican Grill (CMG -1.29%), which is doing a 50-to-1 exchange, estimated to occur on June 26. Investors have gotten excited and sent shares of Chipotle close to all-time highs at around $3,000 a share.
I am here to tell you that stock splits don't matter. A stock is worth the future cash it will distribute back to shareholders, discounted back to today. For Chipotle, it is irrelevant whether it has one share that trades at a price of $80 billion (its current market capitalization) or 80 billion shares trading for $1. An investor will make money if the company generates more in earnings.
Forgetting the irrelevant stock split, how does Chipotle stack up when doing fundamental analysis? Should you buy the stock at current prices? Let's take a closer look and find out.
A lot of room for store count growth
As the premier fast-casual restaurant chain for Mexican grub, Chipotle now has 3,437 store units, mostly in the United States. Over the long term it plans to open 7,000 stores in North America, and it is starting to dip its toe into international markets. Specifically, it has a few stores opened in Western European markets, and just launched a partnership to bring Chiptole to Dubai and the Middle East.
While it is unclear how many locations Chipotle plans to build internationally, I think it is reasonable for the company to hit a few thousand at some point over the next decade or two, especially if it moves to other markets such as Australia. That would bring it to a total addressable market of at least 10,000 restaurants, which I don't think is crazy. McDonald's, for reference, has over 40k locations worldwide.
How much would this mean in sales? Today, the average Chipotle generates $3 million in annual sales, a number that has grown at a single-digit rate in recent years as the company keeps up with inflation. Eventually, Chipotle should hit an average restaurant sales level of $3.5 million. Apply that to 10,000 locations and you have $35 billion in annual sales compared to $10 billion today. Of course, there are many years of growth needed to hit these sales figures, but Chiptole has a clear line of sight to achieving these growth goals.
Can profit margins keep moving higher?
Okay, we have some estimates on Chipotle's sales potential. Now let's move to what really matters to investors: profits. Chipotle has done a great job in recent years to expand its operating margin, recovering back to 16.5% in the last 12 months. It has taken almost 10 years for the company to recover from its food-borne sickness outbreak, when profit margins were pushing toward 20%.
Over the long term, investors should expect some small levels of operating leverage as Chipotle further scales around the globe. Don't expand massive margins from a restaurant concept, though. There will always be major labor and food costs for Chipotle, which will likely keep its profit margins in the 15%-20% range.
Assuming Chipotle can hit an 18% consolidated margin at its $35 billion future sales estimate at 10k locations, the company will be generating $6.3 billion in annual profits at some point down the line.
CMG Operating Margin (TTM) data by YCharts
Don't worry about a stock split, focus on valuation
Again, investors shouldn't worry about a 50-to-1 stock split for Chipotle. It has no bearing on the intrinsic value of Chipotle, how many people are going to visit its stores, or any of its input costs. What matters is how much it will earn in cash for shareholders in the coming years.
I think Chipotle can generate over $6 billion in earnings once it hits 10,000 locations. At a current market cap of $80 billion, that would give Chipotle stock a cheap-looking price-to-earnings multiple (P/E) of 13. The problem is that it will take Chipotle many years to reach this earnings level. Even if it ups its store opening rate to 400 a year (it opened 271 in 2023), it will take Chipotle over 16 years to reach 10,000 locations worldwide.
This is not an overnight growth story like Nvidia. Chipotle is a good business, but one where 10-plus years of earnings growth is already priced in. Forget the stock split -- this is why you should avoid buying shares of Chipotle stock. The stock is overvalued right now and likely to disappoint investors who buy today.
