Chipotle Mexican Grill (CMG 0.44%) made headlines a couple of months ago that investors appear to be cheering for these days. Since the announcement of a 50-for-1 stock split in March, shares have climbed about 14%.
Investors probably view this as a key catalyst that could send shares of this restaurant enterprise to new heights -- and it might present a potential buying window.
Before shareholders vote in June on the approval of this stock split, is Chipotle a once-in-a-generation investment opportunity?
A historic stock split
Investors should first understand the mechanics of a stock split. When a company does well for a long period of time, it's not unusual to see the share price rise to a high nominal figure. Management teams keep tabs on the share price. Their goal is to make the stock more accessible to all investors, even ones with less capital.
"This is the first stock split in Chipotle's 30-year history, and we believe this will make our stock more accessible to employees as well as a broader range of investors," said CFO Jack Hartung in a press release announcing the news in March.
If this proposal gets approved, then every existing shareholder will receive 49 more shares of Chipotle stock. So, there will be 50 times more outstanding shares, all of which will trade at 1/50th the current price. This can be seen as cutting a pizza into smaller slices.
Investors need to realize that from a fundamental perspective, everything else stays the same with the business. This is still a company that operates restaurants that sell Tex-Mex food in a fast-casual setting.
NYSE: CMG
Key Data Points
Watch your appetite
Now, let's return to the original question of whether or not Chipotle is a once-in-a-generation investment opportunity. It's important to separate the business and the stock from a quality and valuation perspective, respectively.
If you looked at Chipotle's financial results, you'd assume we are in a robust economic backdrop. Once again, the company proves that its superior value proposition, namely selling food with real ingredients at compelling price points, resonates tremendously with consumers.
In the first quarter of 2024, Chipotle reported revenue growth of 14.1%. This was boosted by a same-store sales gain of 7%, as well as the opening of 47 new locations. This followed a 14.3% revenue increase for all of 2023. Demand isn't an issue, which is impressive given that Chipotle raised menu prices on numerous occasions over the past couple of years to combat inflationary pressures.
That pricing power helped drive a sizzling 23.2% rise in net income in Q1. Chipotle's profitability has improved at a faster pace than the top line, as operational efficiencies take hold.
Looking ahead, there is a sizable expansionary runway for the business to penetrate. Management is confident that Chipotle can double its footprint of 3,479 stores (as of March 31) to 7,000 in North America. This target is up from a previous goal of 6,000, indicative of the leadership team's rising optimism.
Even more eye-opening, this figure doesn't include expansion into overseas markets. Chipotle already has a tiny presence in Europe. And it just opened its first location in the Middle East, with three more planned. If these stores perform well, it's anyone's guess what the ultimate store count could be.
However, just because a company is dominating its industry, growing sales and profit at a rapid clip, and staring at tremendous growth potential, that doesn't make the stock an automatic buy. The missing ingredient we need to add to our analysis is valuation.
Unlike the burritos and bowls it sells, the stock is extremely expensive, trading at a price-to-earnings ratio of about 68. Credit goes to the shares' huge outperformance in recent years.
While I believe Chipotle is far from being a once-in-a-generation investment opportunity today, the company should still be on your radar. If there's a major pullback, then the stock could be a smart buy.
