Chipotle Mexican Grill (CMG +2.14%) stock has rallied about 340% over the past five years as the S&P 500 rose 85%. The fast-casual restaurant chain repeatedly impressed investors with its robust growth, consistent expansion, and rising margins.
Today, the stock may seem expensive at 57 times forward earnings estimates, but a look at its growth story through four simple charts is enough to see if it's still worth buying.
Image source: Getty Images.
1. Consistent restaurant openings
Unlike McDonald's, which spun off Chipotle in 2006 and generates most of its revenue from franchise fees, Chipotle directly owns and operates all of its restaurants. That business model is more capital-intensive, but it allows the company to tightly control its supply chain, maintain better quality-control measures, and freely expand without relying on franchisees.
Chipotle is opening new restaurants at a much faster pace than many of its peers as well. Its number of year-end stores rose from 2,491 in 2018 to 3,437 in 2023, and the company plans to open 285 to 315 new locations this year.
Data source: Chipotle. Chart by author.
2. Impressive comps growth
Some restaurants open lots of new locations to boost their sales but then fail to grow their comparable-store sales as they mature. Therefore, it's often a red flag when a restaurant chain has positive revenue growth but negative comps growth.
Once again, this is an area where Chipotle stands out from its peers. In addition to opening new stores every year, its comps are consistently rising. This key industry metric even climbed during the start of the pandemic in 2020, driven by robust digital sales, and it continued rising over the following three years. Management expects to generate mid-to-high single-digit comps growth in 2024.
Data source: Chipotle. Chart by author.
3. Expanding restaurant-level operating margins
Over the past two years, the restaurant sector faced tough inflationary headwinds as food and labor costs rose. But after dipping during the pandemic in 2020, Chipotle's restaurant-level operating margins expanded over the next three years.
Data source: Chipotle. Chart by author.
Chipotle offset the inflationary pressure by raising its menu prices and opening more drive-thru Chipotlanes to accelerate order volumes. It expects to open Chipotlanes at more than 80% of its new locations this year.
4. Consistent revenue and earnings growth
Chipotle's new store openings, stable comps growth, and expanding margins all enabled it to generate stronger revenue and earnings growth than major fast-food chains like McDonald's and Yum! Brands over the past five years.
Source: YCharts.
From 2023 to 2026, analysts expect Chipotle's revenue to post a compound annual growth rate (CAGR) of 14% as its earnings per share (EPS) increase at a CAGR of 22%. That growth should be fueled by the expansion of its digital orders (which accounted for 36.5% of its total revenue in the first quarter of 2024), the stickiness of its loyalty program, and its expansion into Europe.
By comparison, analysts expect just single-digit revenue and earnings growth for McDonald's and Yum! Brands over the same period.
NYSE: CMG
Key Data Points
Is it the right time to buy Chipotle?
Chipotle's business is still firing on all cylinders, but a lot of its growth is already baked into its valuation. McDonald's trades at just 21 times forward earnings, while Yum has a slightly higher forward multiple of 23. Therefore, Chipotle stock could experience volatility, especially if its comps growth cools off or its profit margins decline.
For now, investors can still nibble on Chipotle stock as it gears up for its 50-for-1 stock split on June 26. However, it's smarter to dollar-cost average into this growth play over several months or quarters instead of going all-in at current levels.
