The time has finally come. On June 16, shares of Chipotle Mexican Grill (NYSE: CMG) underwent a closely watched and historic 50-for-1 stock split. The previous four-figure price tag of the stock is currently at about $65.
Management felt this was the right proposal, given how well the restaurant company’s shares have been performing. They’re up 44% in 2024, and in the past five years, have soared 348%.
Is this magnificent restaurant stock a no-brainer investment opportunity right after its 50-for-1 stock split?
No fundamental changes
Stock splits typically happen after a company’s nominal share price gets too high. Of course, this is a good problem to have for Chipotle because it means the stock has done well for investors over the years. But by artificially cutting the price, the stock can be accessible to more investors.
Chipotle’s outstanding share count expanded 50-fold to 1.4 billion. And the share price is now 1/50th what it was before this event. It’s helpful to think of this situation as a pizza being cut into smaller slices.
It’s really important to remember that from a fundamental perspective, nothing has changed with Chipotle. This is still the same business it was yesterday. Through its fast-casual stores, this company still sells Tex-Mex food like bowls and burritos.
Since the executive team first announced the stock split in March, shares have climbed 17%. Perhaps the anticipation of this happening is precisely what has driven even greater bullish sentiment from the market.
Curb your appetite
As we view the company and stock today to assess if Chipotle is a no-brainer investment opportunity, it’s critical to consider the quality of the company. This is a stellar business.
The company continues to post strong financial results, despite ongoing macro headwinds. After revenue jumped 14.3% in 2023, it rose 14.1% in Q1 2024 (ended March 31). This was boosted by same-store sales growth of 7%, as well as the opening of 47 new restaurants.
Chipotle is extremely profitable, which is supported by its proven pricing power. In the past five years, the company’s operating margin has averaged 11.5%. And from a store-level perspective, 27.5% of revenue turned into operating profit in the first quarter, an outstanding figure.
There’s still a lot of growth to be achieved. Management sees the potential to have 7,000 stores open in North America one day, roughly double the current footprint. This goal is higher than the previous target of 6,000, so it shows you that the leadership team is extremely optimistic about Chipotle’s long-term prospects to further penetrate its key market.
All of these positive factors might make you believe that this stock is a no-brainer buying opportunity. However, consider just how high the expectations have gotten. It seems wild to me to pay a price-to-earnings ratio (P/E) of 70.1 for the shares of this business. There’s no margin of safety for investors should the company post quarterly financial results that the market isn’t pleased with for whatever reason.
Of course, unsustainable trends can last a lot longer than people might think. And this could be the case with Chipotle stock, as it has traded at a steep valuation for a while.
Not only do I think the stock should be avoided, but I’m also not comfortable calling this a no-brainer investment opportunity right now. Maybe if the P/E multiple dropped below 30, I’d adopt this view. This might not happen for a long time, though.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Is Chipotle a No-Brainer Buy Right After Its 50-for-1 Stock Split? The Answer Might Surprise You. was originally published by The Motley Fool
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