One of the top growth stocks in the restaurant business is undoubtedly Chipotle Mexican Grill (CMG -0.61%). It's often associated with high growth and success, with its strong numbers serving as benchmarks for other businesses.
Investors are frequently willing to pay significant premiums for a business like Chipotle, and that's evident in its valuation. Currently, the stock trades at an all-time high, up around 40% this year.
But has the valuation finally become too rich, and is now the time to pull away from the stock, or can it still be a good buy?
Business is still booming
While many fast-food restaurants have been struggling with growth lately, Chipotle has still been posting strong numbers. For the first three months of 2024, revenue rose by 14% to $2.7 billion. And its comparable-store sales (comps) were also up 7%.
Comps are a more relevant metric for restaurant stocks as they measure the revenue in restaurants that were open a year ago, whereas overall revenue can get a boost from new locations opening up. Posting high-single-digit growth is encouraging for Chipotle investors, particularly when the economy is far from ideal with inflation weighing on consumers.
Not only has the company been growing its top line, but over the years, it has also significantly strengthened its bottom line. Diluted earnings per share this past quarter were $13.01, a significant 24% improvement from the same period last year. The strong earnings growth is part of a longer-term trend for Chipotle.
CMG revenue (quarterly) data by YCharts.
Is Chipotle's valuation too high?
There's no denying that Chipotle is a great growth stock. The company has performed exceptionally well even amid a challenging economy.
But investors should always consider a stock's valuation, because that can have a significant impact on the returns the shares might be able to generate. If a multiple is high, then it effectively means that investors are paying for a lot of future growth, and it could take years before an investment generates strong returns.
Today, Chipotle's stock is trading at close to 70 times its trailing earnings. But investors have paid higher multiples for the stock in the past.
CMG PE Ratio data by YCharts; PE = price to earnings.
But paying such a steep multiple for a stock that is growing by 14% appears excessive; it could be overdue for a correction. And the stock's price/earnings-to-growth ratio (PEG) of 2.7 also suggests the valuation has become a bit extreme.
PEG factors in the earnings growth that analysts expect from the business over the next five years. When it is at 1.0 or less, then it's considered a good buy, and the higher above that, the more expensive the stock is.
Should you buy Chipotle stock today?
Chipotle has a solid brand, and the business has been able to increase its revenue without having to compromise profitability, which is great for investors. But with the economy still far from ideal, growth could come down in the future, which might put downward pressure on the stock.
News of a stock split did generate interest recently, but investors shouldn't rely on that momentum lasting if its results don't remain strong. At such a high valuation, investors are pricing in a lot of strong continued growth. And if that doesn't happen, the stock might be vulnerable to a sell-off given its high valuation.
Although Chipotle can still make for a good long-term investment, there might be better options for investors right now since the stock could be approaching a peak.
