Chipotle Mexican Grill (CMG 1.67%) is a household name for the hungry. The chain that put "fast casual" on the map has consistently grown its reach, serving customers through what's currently 3,479 locations -- and growing.
Chipotle is also surprisingly consistent when it comes to feeding its stakeholders. The stock is up 51%, 128%, and 341% over the past one, three, and five years, respectively.
This doesn't mean that the chain is perfect. Let's go over the positives and negatives of Chipotle as an investment to see if it's buy, sell, or hold right now.
NYSE: CMG
Key Data Points
Buy Chipotle
The historical stock gains are impressive, and in the cutthroat restaurant industry, Chipotle is one of the easiest bets to make. It has a cult following that has proven loyal, even as others have taken on its fast-casual assembly-line approach to provide tasty meals at reasonable price points.
Growth has been consistent after seeing its sales soar 26% in 2021 coming out of the understandably suppressed pandemic-related slowdown a year earlier. Revenue rose 14.4% in 2022, 14.3% in 2021, and up 14.1% in the first quarter of this year.
Store-level growth remains impressive. Chipotle is eyeing comps in the mid- to high-single-digit range for this year. Expansion is how that impressive unit-level production turns into double-digit gains on the top line, and the chain expects to add 285 to 315 new restaurants this year.
The bottom line is even more impressive. This is shaping up to be the fourth year in a row in which profit growth exceeds the already impressive revenue jumps. Net income has increased by at least 36% in each of the last three years, climbing 23% in the first quarter of this year, which it posted in late April. Analysts see Chipotle's earnings per share rising 24% this year on a 15% increase in revenue.
Image source: Chipotle Mexican Grill.
Sell Chipotle
Valuation is often cited as the biggest obstacle for investors. Chipotle isn't cheap. It's trading for 56 times this year's projected earnings and 47 times next year's analyst profit target.
The bullish counter here is that bears said the same thing a year ago, three years ago, and five years ago. You see how well things worked out for those who understood that you have to pay a premium to own a name like Chipotle. However, there's no denying that Chipotle is richly valued relative to traditional market multiples.
Another knock on Chipotle is that it has all of its tortilla chips in the same basket. Chipotle has tried to diversify into new concepts. It's given pizza a spin with Pizzeria Locale, burgers through Tasty Made, and Asian street food via ShopHouse. All three failed.
It launched a new concept last year -- Farmesa Fresh Eatery -- as a ghost kitchen, hoping to toss premium salads and protein-topped grain bowls. The concept was shuttered in April.
The flagship concept is obviously solid, and Chipotle feels it can more than double its current store base without saturating the market. It's still problematic that it hasn't been able to strike lightning in a bottle with a sister concept.
Hold Chipotle
Chipotle is scheduled to complete a 50-for-1 stock split later this month, which it announced in March. I didn't list this as a reason to buy because any related pop should be short-lived in nature. Stock splits are zero-sum games but help make it more accessible for options trading. It's probably a good reason to at least hold on at this point until the shares begin trading post-split on June 26.
The best reason to hold is that the trend is Chipotle's friend right now. Companies calling employees back to in-office work should benefit the chain, which is a favorite lunch spot for workers.
The company's efficiency also continues to improve. It introduced a second assembly line dedicated to mobile and delivery app orders when it began to see its digital sales spike coming out of the pandemic. It's also been making pick-ups more convenient for customers with dedicated drive-thru lanes, when possible. A hearty 80% of its new openings this year will feature Chipotlanes.
Chipotle, the stock, isn't Cheap-otle. It will be prone to corrections in volatile markets. It's also been vulnerable to economic downturns, pandemics, and its own food scare nearly a decade ago that made hundreds of customers sick.
However, if you're looking for a restaurant stock to spice up your portfolio, it's hard to fathom Chipotle not being near the top of your list. It seems to be a hold -- if not an outright buy at this point -- despite its strong gains over the past year.
