Chipotle: Buy, Sell, or Hold?

Chipotle: Buy, Sell, or Hold?

Last month, Chipotle Mexican Grill (NYSE: CMG) announced plans for a 50-for-1 stock split. Since the announcement, the fast-casual Mexican restaurant’s stock has jumped 7% to an all-time high of about $3,000 per share.

Those latest gains capped off a one-year surge of more than 70%. Given this strong rally and the excitement around the 50-for-1 split, let’s dive into this business to see how investors should proceed with Chipotle stock.

What’s going on with Chipotle’s stock split?

If approved at Chipotle’s annual meeting on June 6, shareholders on record as of June 18 will receive an additional 49 shares for each share held after market close on June 25.

The stock split will increase the number of outstanding shares without changing the company’s market capitalization. Think of the process like cutting a burrito into 50 smaller portions; while the overall size of the burrito remains unchanged, there are now more portions.

While the stock split won’t inherently change the value of Chipotle’s business, it would bring current share prices down from nearly $3,000 to about $50. That makes it more approachable for retail investors, and with more people able to afford shares, demand for the stock could rise.

Chipotle is generating record revenue and profit

As for the business itself, Chipotle is putting up record financial results with $9.9 billion of revenue and $1.2 billion of net income for 2023, up 14.3% and 36.7%, respectively. Comparable sales increased 7.9% for the year, while restaurant-level operating margin jumped from 23.9% to 26.2%.

Pandemic-era initiatives continue to pay off for the company as well. Of the 271 new restaurants opened in 2023, 88% featured a Chipotlane drive-through. Digital orders  made up 37.4% of revenue last year, and the company’s rewards program topped 36 million members. For 2024, management expects comparable sales growth in the mid-single-digit range plus 285 to 315 new restaurant openings.

This leading restaurant chain still has room to grow

Chipotle started the year with 3,437 locations. While current guidance suggests the company could expand its locations 8% to 9% this year, management has also mentioned a long-term goal of more than doubling its store count to reach 7,000 restaurants in North America.

The company also believes average unit volumes can climb from their current $3 million to $4 million. Based on those long-term targets, annual revenue could reach $28 billion, or about 180% higher than last year’s result.

Thanks to its strong balance sheet and rising cash flows, Chipotle can afford the investments to make management’s long-term targets a reality as well.

Image source: Getty Images.

Is Chipotle a buy, sell, or hold?

Before purchasing any stock, even one firing on all cylinders like Chipotle, it’s imperative to assess the company’s valuation.

As of this writing, Chipotle trades at a price-to-earnings (P/E) ratio of 67. That compares to a P/E ratio of just 25 for the S&P 500. While value investors may be shaking their heads at the thought of investing in any stock with a price tag as high as Chipotle’s, its current valuation is roughly 14% lower than its five-year average of 78, despite the stock’s strong gains in the past year.

Management has an attractive long-term vision and the track record to back it up. Investors willing to pay the premium should have a long-term mindset and stomach for volatility as a single earnings report that comes in below expectations could send the stock plunging.

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Collin Brantmeyer has positions in Chipotle Mexican Grill. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

Chipotle: Buy, Sell, or Hold? was originally published by The Motley Fool