Chipotle Mexican Grill (NYSE:CMG) It made headlines a few months ago, and investors seem to be rooting for it these days. After the announcement of a 50-for-1 stock split Shares rose about 14% in March.
Investors likely view this as a key catalyst that could push the restaurant company’s stock price to new heights, and could present potential buying opportunities.
Before shareholders vote to approve this stock split in June, is Chipotle a once-in-a-generation investment opportunity?
historic stock split
Investors first need to understand how stock splits work. If a company performs well over a long period of time, it is not uncommon for the stock price to rise to a nominal value. Management constantly monitors stock prices. Their goal is to make stocks more accessible to all investors, even those with less capital.
“This is the first stock split in Chipotle’s 30-year history, and we believe it will make our stock more available to a wide range of investors, not just our employees,” said Chief Financial Officer )’s Jack Hartung said in a press release announcing the news in March.
If the proposal is approved, all existing shareholders would receive an additional 49 shares of Chipotle stock. That means the number of outstanding shares will be increased by 50 times, and all of them will trade at 1/50th of their current price. This can be thought of as cutting pizza into small slices.
Investors need to realize that from a fundamental perspective, everything else about the business remains the same. This is a company that still operates restaurants that serve Tex-Mex cuisine in a fast-casual setting.
Be careful of your appetite
Now, back to the original question of whether Chipotle is a once-in-a-generation investment opportunity. It is important to separate business and stocks in terms of quality and valuation, respectively.
If you look at Chipotle’s financial results, you’d think the company is in a solid economic position. The company has once again proven that its strong value proposition of selling food made with real ingredients at attractive prices resonates with consumers.
In the first quarter of 2024, Chipotle reported revenue growth of 14.1%. This was driven by his 7% increase in same-store sales and the opening of 47 new locations. Following this, he saw a 14.3% revenue increase for all of 2023. Demand is not the issue. This is impressive considering Chipotle has raised menu prices multiple times over the past two years to combat inflationary pressures.
This pricing power led to a strong 23.2% increase in net income in the first quarter. Chipotle’s profitability is improving at a faster pace than its sales as operational efficiency takes hold.
Looking to the future, there is considerable expansion runway ahead for the business to penetrate. Management is confident Chipotle can double its store count in North America from 3,479 (as of March 31) to 7,000. This goal is an increase from the previous goal of 6,000 people and shows the leadership team’s growing optimism.
Even more surprising, this number does not include expansion into overseas markets. Chipotle already has a small presence in Europe.and it just opened First base in the Middle EastThree more are planned. If these stores do well, who knows how many stores they will end up with?
But just because a company dominates an industry, is rapidly increasing sales and profits, and sees incredible growth potential doesn’t automatically mean its stock is a buy. The missing element that needs to be added to the analysis is evaluation.
Unlike the burritos and bowls the company sells, this stock is very expensive, trading at a price-to-earnings ratio of about 68 times. This is thanks to the stock’s significant outperformance in recent years.
While I believe Chipotle is far from a once-in-a-generation investment opportunity right now, this company is still worth keeping an eye on. A significant drop could make the stock a smart buy.
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Neil Patel and his clients have no position in any stocks mentioned. The Motley Fool has a position on Chipotle Mexican Grill and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Is Chipotle a once-in-a-generation investment opportunity ahead of a 50-for-1 stock split? Originally published by The Motley Fool
