Had you invested in the S&P 500 five years ago, you would have more than doubled your initial capital outlay. But an investment in Chipotle Mexican Grill (CMG +1.62%) back then would have soared nearly fivefold. The momentum has continued; shares are up 35% just this year.
You might be eyeing this booming restaurant stock as a potential addition to your portfolio. But before you make a decision, here are two things you need to know about Chipotle first.
Great business
Even with ongoing inflationary pressures, Chipotle continues to post strong financial results. After reporting 14.3% revenue growth in 2023, the business saw sales rise 14.1% in this year's first quarter. That was boosted by a 7% same-store sales jump. Management expects this metric to rise by a mid- to high-single-digit percentage for the full year.
Including the most recent quarter, Chipotle has reported 15 straight quarters of double-digit revenue growth. The company showed that it could successfully navigate pandemic-related disruptions, with momentum that continues to this day.
Management emphasizes Chipotle's customer value proposition, something executives believe holds true even after multiple rounds of menu price increases. During Q1, that same-store sales boost was mostly attributed to higher foot traffic, which is a very encouraging sign. It indicates that consumers really view Chipotle as being a good deal even as the price of everything seems to be going up.
A growing sales base has been a boon on the profitability front. Chipotle's quarterly operating margin has expanded a stellar 90% in the past five years. Again, pushing up menu prices has helped, as have economies of scale. To see an increasing bottom line at this time proves how Chipotle is successfully navigating the inflationary environment, whether it's higher costs for food, paper products, or labor.
Looking ahead, the leadership team believes the good times will keep on rolling. Chipotle currently has 3,479 stores. But over the long term, there is room to have at least 7,000 locations open in North America, with a target of $4 million in annual sales volume per store. This means that Chipotle's ultimate revenue potential is a whopping $28 billion, up from $10.2 billion in the past 12 months.
NYSE: CMG
Key Data Points
Expensive stock
Thanks in large part to Chipotle's surging stock price, investors who want to buy today are looking at a very expensive opportunity. And that doesn't bode well for future returns, in my opinion.
As of this writing, Chipotle shares trade at a price-to-earnings (P/E) ratio of 65.5. This is in nosebleed territory, and it highlights the extreme optimism and bullishness the market has for this business. I guess that's understandable when you consider the company's performance in recent times.
This valuation is still below Chipotle's trailing-five-year P/E multiple. And during the last five years, the stock has obviously performed well. Some investors might think that means it is still a good buying opportunity, and that Chipotle deserves this steep valuation.
But I just don't agree with that line of thinking. It leaves zero margin of safety should the company report revenue or earnings that even slightly miss Wall Street's expectations.
According to consensus analyst estimates, Chipotle is projected to grow revenue and diluted earnings per share by 14.1% and 20.8%, respectively, from 2023 to 2026. That outlook is certainly favorable, but does it justify paying a P/E ratio of nearly 66? I don't think so.
Chipotle has proven that it's a quality enterprise, but the stock should be put on your watch list for now. Only when the valuation becomes more reasonable should investors consider buying shares.
