Perhaps no restaurant has made a stronger comeback than Chipotle (CMG 2.97%) over the last decade. After dealing with a huge food safety crisis in 2015, the fast-casual leader is now stronger than ever as it closes in on 3,500 stores with impressive unit volumes. It brought on a new CEO, Brian Niccol, in 2018 to steer the business, which has paid off handsomely.
Over the last 10 years, Chipotle has posted a 382% total return, and in late June, the company executed a historic 50-to-1 stock split. What does the stock have in store for the rest of 2024? Let's take a look and find out.
Strong growth, expanding margins
The Chipotle model is simple: Open more stores, increase customer traffic, and increase menu prices. This all leads to revenue and profit growth. Last quarter, Chipotle's revenue grew an impressive 14% year over year. This was driven by new store openings but also by 7% same-store sales growth, a solid number for any restaurant concept.
Over the long term, Chipotle's revenue has consistently climbed higher, up 163% in the last 10 years and over 1,000% since its initial public offering (IPO). As the company continues with its growth playbook, this revenue figure should only increase. The chain is generating just over $3.1 million in annual revenue per store right now, but Niccol recently noted the possibility of hitting $4 million in average unit volume.
As restaurant volumes climb, Chipotle will enjoy more operating leverage over its fixed cost base, which shows up in an expanding operating margin. Chipotle's operating margin has expanded to 16.7% over the last 12 months, a high for all periods after its food safety controversy.
NYSE: CMG
Key Data Points
How many locations can it have?
One key factor for Chipotle investors is how many locations the concept can hit. Management expects to reach 7,000 locations in North America alone, or about double its current global store count. International markets present a wide-open growth engine as the company has fewer than 100 stores across Europe and the Middle East, though it plans to open new locations in the United Kingdom, France, Germany, and United Arab Emirates -- among other countries -- in the next few years.
Even if the concept is not as popular outside the United States, it's likely Chipotle can approach 10,000 global locations at maturity. Assuming average sales per restaurant can reach $3.5 million by that time, that equates to $35 billion in annual sales. Over the last 12 months, revenue was $10.2 billion. Margins should continue to climb too, and it wouldn't be surprising for Chipotle to hit 20% operating margins over the next five to 10 years. On $35 billion in sales, that is $7 billion in annual earnings.
Data by YCharts.
The stock is expensive, despite its growth prospects
Clearly, Chipotle has a bright future ahead of it. I wouldn't be surprised to see the stock climb through the rest of 2024 as long as its same-store sales growth holds up. Ultimately, though, it's hard to predict short-term price movements for a stock. Where Chipotle finishes at the end of 2024 is fairly random. The stock split is also meaningless in the grand scheme of things. The price of a stock doesn't matter -- its market cap and enterprise value do.
However, over the long term, Chipotle may underperform the broad market unless it absolutely crushes expectations. The stock trades at a price-to-earnings ratio (P/E) of 62, or more than double the S&P 500 average. It will likely take the company at least 10 years to reach its target for 7,000 North American stores. Assuming operating margin expands to 20% in that period and a 20% corporate tax rate, its net income will eventually hit $5.6 billion.
Based on Chipotle's $79 billion market capitalization as of this writing, even its 10-year forward P/E ratio is over 14. Much of the company's long-term opportunity is already priced into the stock. Despite Chipotle's impressive growth prospects, it's hard to see a world where the stock can repeat its performance from the last five or so years. Its valuation has just gotten too stretched to be reasonable.
