Chipotle Mexican Grill (NYSE: CMG) is having a moment. The company’s stock has been red-hot this year, gaining about 70% since last November. And now, investors are looking forward to its upcoming 50-to-1 stock split. When markets open on June 26, shareholders will own 50 times as many shares as they did at the close of trading on June 25, but the price of each one will be about one-fiftieth of what it was before. The stock split won’t change the value of people’s investments or the valuation of the company — at least, not in and of itself.
It will, however, make the shares somewhat more accessible to smaller retail investors, including Chipotle’s employees. Chief Financial Officer and Chief Administrative Officer Jack Hartung said the move would help the company “reward our team members and empower them to have ownership in our company.” And as shares become more accessible, demand for them could increase, which could add to the momentum behind the stock.
Regardless of the direct and indirect impacts of a split, the question remains: Is Chipotle a good investment at its current valuation?
Impressive growth
Growing revenues consistently, especially at double-digit percentage rates, is one of the surest ways to get Wall Street to love a company. Chipotle has been doing just that at a time when many of its competitors are struggling. Take a look at this table, which shows Chipotle’s top-line growth for the last five years compared to McDonald’s (NYSE: MCD) and Yum! Brands (NYSE: YUM), the parent company of KFC, Taco Bell, Pizza Hut, and The Habit Burger Grill.
|
Company |
2019 Revenue Growth |
2020 Revenue Growth |
2021 Revenue Growth |
2022 Revenue Growth |
2023 Revenue Growth |
|---|---|---|---|---|---|
|
Chipotle |
14.8% |
7.1% |
26.1% |
14.4% |
14.3% |
|
McDonald’s |
(0.5%) |
(10.1%) |
20.9% |
(0.2%) |
10% |
|
Yum! Brands |
(1.6%) |
1% |
16.5% |
3.9% |
3.4% |
Data sources: Company filings.
The only year Chipotle didn’t post double-digit percentage growth was 2020. (I think we might know why.) Still, despite pandemic lockdowns, it achieved growth of more than 7% during a year when McDonald’s revenue shrank by more than 10%.
The story is similar for net income. Chipotle has more than doubled its earnings since 2021, well outpacing its peers.
While top-line growth is important to investors, though, it’s not everything.
Chipotle’s valuation should give you pause
Chipotle currently trades at a price-to-earnings (P/E) ratio of 67.7. That’s pretty high for the restaurant industry. McDonald’s and Yum! both trade at ratios just above 20.
However, investors are often willing to pay a premium for a stock based on the expectation of earnings growth.
To weigh that, they look to its price/earnings-to-growth (PEG) ratio, which you get by dividing the company’s P/E by its expected growth rate over a given period. This provides a better idea of a company’s value relative to its forecast future earnings. In this case, lower (but not negative) is better, and a stock with a PEG ratio below 1 is generally viewed as being undervalued.
Chipotle’s PEG ratio is 2.5, which is in line with McDonald’s 2.9 and Yum! Brands’ 2.2. So on a forward-looking basis, maybe it’s not as overvalued as it might appear to be.
Yet one weakness of the PEG ratio is its reliance on earnings growth forecasts — there’s no guarantee those predictions will prove accurate. If, for example, the economy turns and consumers pull back on their discretionary spending, restaurant sales will dip. Although in that circumstance, all three of these companies would likely suffer, a dip in sales could hit Chipotle’s stock harder because it would expose its current overvaluation. Why buy a stock trading at a premium if there isn’t an expectation that future earnings will justify it?
It’s also worth considering that Chipotle’s revenues have been boosted by the company’s aggressive expansion. It opened 271 new locations last year alone. However, comparable-store sales — which don’t factor in the impact of adding more stores — grew by just 7.9%. That rate was lower than McDonald’s 9% comps growth.
Despite TikTok pushback, Chipotle still seems to be on track
Currently, Chipotle is catching some heat from social media users who’ve been accusing it of reducing its portion sizes to maximize profits. In response, some customers have been using their smartphones to record the store workers preparing their burritos and bowls in an attempt to either prove the assertion or to induce the employees to be more generous with their scoops.
The company, meanwhile, has stated categorically, “There have been no changes in our portion sizes,” and added that management has “reinforced proper portioning with our employees.”
Whether portion sizes have actually changed may be less relevant than consumer perception — and consumer response. The kerfuffle hasn’t seemed to impact the chain’s numbers yet, but if it continues, it could. Chipotle built its brand, in part, on burritos that were bursting at the seams.
Regardless of these concerns, Chipotle still seems to be doing a whole lot right. Given the growth it is delivering quarter after quarter and year after year, I’m inclined to look past its high valuation, but I’d also recommend exercising caution. Keep an eye on the TikTok protests, the company’s response to them, and whether or not the issue has a material impact on revenues in the coming quarters. But outside of that concern, Chipotle continues to look like a good bet.
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Johnny Rice has 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.
Chipotle’s Stock Split Is Almost Here: Time to Buy Now Before It Happens? was originally published by The Motley Fool
