Is Chipotle Stock A Buy Ahead Of Its Large 50-For-1 Stock Split?

Shares of Chipotle Mexican Grill CMG 0.0% are trading at all-time highs, days after the burrito chain reported upbeat first-quarter results and raised comps outlook for the year. CMG stock has been climbing steadily ever since Chipotle announced the huge and historic 50-for-1 stock split last month, the first ever since its IPO in 2006. However, the all-important question lingers; given the recent stellar rally, is Chipotle stock still a buy ahead of its stock split?

Why Is Chipotle Stock Splitting?

With the Chipotle stock trading at all-time highs, the stock split seems like a welcome move as it would render CMG stock more affordable and appealing for a broader investor community. The proposed stock split aims at making CMG stock accessible to Chipotle’s employees as well. Chipotle has announced a special one-time equity grant for all its restaurant general managers and veteran crew members with 20-plus years of experience. When a high flying stock like CMG pursues a stock split, especially a massive-sized one as this, it also gives rise to speculation whether Chipotle is aiming for an inclusion in the the prestigious Dow 30 following Amazon’s AMZN 0.0% lead. High priced stocks are not typically included in the Dow Jones Industrial Average, as it is a price-weighted index, meaning that even smaller fluctuations in a high-priced stock may significantly impact the index. (For more possible stock splits, read Will Nvidia stock will split in 2024?)

When Is CMG Stock Splitting?

The CMG stock split proposal will be put to a shareholder vote on June 6. If approved, CMG shareholders of record as of June 18, will receive 49 additional shares for every share owned, after market close on June 25. Starting June 26, CMG stock will start trading on a post-split basis.

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Key Metrics To Know About Chipotle (CMG) Stock

CMG Stock Valuation

Chipotle stock is up more than 7,000% since its IPO in 2006 from a debut trading price of around $45 (2x the proposed IPO price of $22) on the NYSE. In the past year alone, the stock has rallied 57% and is currently trading at valuation metrics way higher than its sector. However, a deeper dive beyond these lofty valuation numbers shows that Chipotle may deserve the premium valuation because of its profitable growth and resilience amid rising inputs costs and wages.

While many restaurants are struggling to cope in the inflationary environment, Chipotle has managed to hike menu prices and still attract traffic. This is reflected in Chipotle’s transaction growth of 5.4% in first-quarter 2024, driving a 7% rise in same store sales on a 2.8% rise in systemwide menu prices. This does not include Chipotle’s latest 6% to 7% menu price hikes in California restaurants to navigate the state’s new minimum fast-food wage of $20 per hour. The growth in transactions and comps, despite menu price hikes reflects the value perception of the Chipotle brand among its health-conscious customers.

Chipotle’s Profitable Growth Expected To Continue

For a big company with a 3,400 restaurant footprint, Chipotle keeps growing revenues and earnings at a robust pace. In the last three years, revenue has increased from $7.5 billion in 2021 to $9.9 billion in 2023 growing 15% annually. For 2024 and 2025, analysts project revenue growth of 14%. Net income has nearly doubled from $652.9 million or $22.9 per share in 2021 to $1.2 billion or $44.34 per share in 2023. Analysts project EPS of $55.55 for 2024 and $66.69 for 2025.

Upbeat Quarter, Outlook

Chipotle had a stellar first quarter with net income rising to $359.3 million or $13.01 per share, from year-ago $291.6 million or $10.50 per share. Excluding the negative impact from a $0.36 increase to its legal reserves, adjusted earnings were $13.37 per share, well ahead of the $11.68 per share consensus. Net sales rose 14.1% to $2.7 billion vs. a Street estimate of $2.68 billion. Operating margin for the first quarter rose to 16.3% from year-ago 15.5%, while restaurant level operating margin rose 190 basis points year over year to 27.5%. A 5.4% increase in transactions and a 1.6% increase in average check resulted in a 7% increase in first quarter same store sales. With the strong trends continuing into April, Chipotle now sees comps for the full year in the mid-to-high single digits, up from prior projections of mid-single-digit growth.

Chipotle’s Long-Term Growth Drivers

Chipotle has several long term growth drivers, including:

Restaurant footprint expansion

The elevated CMG stock price reflects tremendous underlying growth in the business that started out as a single restaurant in Denver in 1993 to 3,400 restaurants as of March end, across the U.S. Canada, U.K., France and Germany. Chipotle is targeting a 7,000-plus restaurant footprint in North America in the longer term, more than double the number of current restaurants. In first-quarter 2024, Chipotle opened 47 restaurants, 43 of which had a drive-thru Chipotlane for customers to pick up online/digital orders. For the whole of 2024, Chipotle anticipates opening 285 to 315 new restaurants with more than 80% having a Chipotlane. Compelling unit economics in the U.S. should set the growth dynamics in motion.

Accelerating international expansion

Chipotle owns and operates all its restaurants in North America and Europe. Over the last five years, Canada's unit economics have improved to be on par with the U.S. setting up Canada for rapid expansion. The current footprint of 41 restaurants in Canada is expected to double to 100, as mentioned in the first-quarter earnings call.

Europe is perceived as yet another growth lever for Chipotle, which operates 19 restaurants in the U.K., 6 in France and 2 in Germany. Anat Davidzon, who helped build Chipotle’s Canada business, has the additional mantle of overseeing Europe operations as well. Key changes in the leadership structure should help improve unit economics in Europe and unlock growth potential.

Chipotle opened its first location in the Middle East in Kuwait recently, following a first-ever development agreement in July 2023, signed with the Alshaya Group, an international franchise retail operator. Under the agreement, Chipotle and Alshaya will open restaurants in the Middle East with four planned for 2024, including one in Dubai.

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Throughput improvements to drive incremental transactions

Chipotle has been focusing on improving the speed of service or throughput, which reached its highest levels in four years during the first quarter, showing improvement by nearly two entrees in its peak 15 minutes from last year. This resulted in a 19% year-over-year growth in in-store sales. Quicker service alongside menu innovation amid the paradigm shift toward health-conscious eating habits make the fresh, delicious food more appealing to customers and lead to incremental transactions despite price hikes. The company plans to continue working on throughput excellence.

In the first-quarter conference call, Chipotle’s CEO Brian Niccol, cited Chipotle’s Boston restaurant, where throughput improved sharply from 20 entrees in peak 15 minutes last year to 40 entrees currently and on some days even reached as much as 80 entrees, which is the highest across the company. The CEO also pointed out that this restaurant had low employee turnover and outsized transaction growth emphasizing that throughput improvements resulted in overall better restaurant experience.

Mean reversion opportunity

As we know, strong growth prospects/expectations typically translate to premium valuations in the eyes of the investor. It would also be interesting to note that CMG stock trades at a forward P/E of 58x, still below the company’s five-year historical average of 66x and a mean reversion alone can imply a 14% to15% upside potential for the CMG stock from its current price levels around $,3200.

Risks to the Chipotle business include the highly competitive fast casual restaurant sector, changing preferences of fickle taste buds and CMG stock’s sensitivity to negative news/headlines citing concerns over food safety and food-borne illnesses.

What is Chipotle’s Long-Term Outlook?

Chipotle seems to have found the magic recipe to success and profitable growth. This translates to simple, fresh, healthy and tasty food at affordable prices, alongside quicker in-restaurant service, seamless digital ordering process and faster pickups enabled by Chipotlanes. The company has achieved this tremendous growth in revenues and profits with 3,400 restaurants in the U.S. alone. In Canada, it has managed to bring the unit economics at par with the U.S. and in Europe it is trying to replicate the success it had in Canada with a strong leadership structure. Chipotle is definitely on a growth trajectory, as the company expands its restaurant footprint and international presence with fresh food and delicious recipes that appeal to diverse cultures and ethnicities, but more importantly to health conscious consumers, a rapidly-growing demographic that doesn't let menu price hikes deter it from healthy lifestyle pursuits. Chipotle owns and operates all of its restaurants in North America and Europe, enjoying the benefits of supply chain economics and scale.

For competition, it may be difficult to replicate Chipotle’s food-with-integrity business model at Chipotle’s menu prices. A back-of-the-envelope calculation tells us that when Chipotle reaches its 7,000 restaurant goal in North America, sales are bound to double from the current annual $10 billion (on 3,400 restaurants). CMG stock trades at a trailing 12-month price/sales multiple of 8.5x, but even if we conservatively assume its five-year average multiple of 5.7x sales, you arrive at a market value of $114 billion representing at least 30% upside potential from current stock price levels. This is without counting Chipotle’s stock buybacks. The risks of course include CMG’s susceptibility to negative headlines related to food safety and outbreak of any food-borne illnesses. But, CMG stock has bounced back from such issues in the past and has better controls in place to keep these risks in check. However, no food business is completely immune from safety issues, especially when it handles fresh, unprocessed produce and raw chickens in its kitchen.

Is Chipotle Stock A Buy Ahead of the Split?

Chipotle stock continues its post-earnings winning streak. The alluring growth drivers mentioned above would continue to drive the stock higher in the longer term. But, no stock has a straight upward trajectory. There are bound to be dips and corrections on the way presenting buying opportunities. It is totally subject to the investors' risk appetite. Chipotle stock could be a buy ahead of the split for an investor unconcerned with near-term volatility or its current astronomic prices. The upcoming shareholder vote on June 6 on CMG’s 50–for-1 stock split will be the next near-term catalyst for the stock. The stock will definitely be more affordable for smaller investors once the CMG stock split is approved by its shareholders. On the other hand, this could also push up demand and prices for the CMG stock post split, as more eager investors may want a slice of this tasty and healthy burrito maker.

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Bottom Line

CMG stock is a long-term buy given its simple and profitable business model, and future growth drivers like restaurant footprint growth and international expansion amid the ongoing seismic shift in consumer preferences to health-conscious eating habits. Chipotle’s stock buybacks highlight a significant, hidden value proposition. For investors unconcerned with near-term volatilities or the steep stock price, CMG stock may be a buy ahead of the stock split.