Chipotle Mexican Grill (NYSE: CMG) is doing something it has never done before in its 30-year history. The company is splitting its shares and the operation is scheduled for this week. The decision came after shares rose by triple digits in recent years, topping $2,000 last year and above $3,000 this year.
The reason for such huge profits? This fast-casual restaurant has reported growth quarter after quarter — even excelling during the early pandemic days thanks to its digital ordering system — and has built a brand that keeps customers coming back. Now the stock split will lower the per-share price of this high-flying stock, making it more accessible to a wide range of investors.
Let’s take a look at what to expect – and consider whether this restaurant giant is a buy.
Why launch a stock split?
First, a few points about stock splits in general. These operations involve issuing more shares to existing shareholders to reduce the price of each individual share. They are purely mechanical and do not change the market value of a company, the value of your assets or the valuation of its shares. This means they do not serve as a catalyst for stock performance; investors won’t rush to buy a stock just because a stock split has been announced.
That said, a stock split is generally positive for a company over time because it allows investors who want to make a small purchase to do so without having to rely on fractional shares. And these operations also suggest that a company is optimistic about its future, with the idea that shares can take off again from their new levels.
The new stock price is determined by the ratio of the split, which brings me to the topic of the Chipotle operation. In one of the largest stock splits in the history of the New York Stock Exchange, Chipotle will offer current holders 49 shares for every share they own. Shareholders will receive the shares after the market close on June 25, and the shares will trade on a split basis from the market open on June 26.
Given Chipotle’s share price today – about $3,214 – the price after this 50-for-1 stock split will be around $64.
Although the record day to benefit from the split was June 18, if you purchase the shares before the completion of the split, don’t worry: the right to the additional shares will pass from the seller to you when you make the purchase do.
Chipotle’s earnings growth
So by mid-week, Chipotle’s per-share price will make buying shares easier, but otherwise the investment opportunity will remain the same as before the stock split. Now let’s see if this top restaurant stock is a bargain. No one can say Chipotle hasn’t been successful when it comes to growing profits and expanding margins; over time the company has done this well.
CMG operating margin (annual) data by YCharts
And all this happens during expansion. Last year, Chipotle opened 271 new restaurants, and more than 85% of them are equipped with a digital order pickup window called a Chipotlane. This keeps the company on track to reach its long-term goal of 7,000 restaurants in North America, more than double its current number. Chipotle also aims to reach $4 million in average unit volumes (AUV), or the average revenue each location generates, up from about $3 million currently.
Meanwhile, Chipotle customers keep coming back thanks to the restaurant’s promise of fresh and healthy produce and its focused menu. This helped the company achieve double-digit revenue growth to $2.7 billion in the most recent quarter, and an increase in earnings per share and operating margin.
The valuation problem
This all sounds great, but the only problem with Chipotle is its valuation. The company trades at 57x forward earnings estimates, which easily exceeds 57x valuations McDonald’s And Yum! To notice. They trade for about 20x. I would expect Chipotle to trade higher than these fast food giants, but not by as much.
So, is this stock split a buy? This depends on your investment style. Chipotle’s business has proven its strength over time, and the company has room for expansion in North America and even internationally. This could boost profits well into the future.
For long-term investors who favor growth, Chipotle stock can still deliver solid returns, so you might consider opening a small position in the restaurant giant to diversify your portfolio; the price after the split allows you to do this more easily. But given the stock’s steep valuation, value investors may find better opportunities elsewhere.
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Adria Cimino has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Chipotle’s stock split takes place this week. Here’s what to expect. was originally published by The Motley Fool
