The time has finally come. On June 16, the shares of Chipotle Mexican Grill (NYSE:CMG) underwent a closely watched and historic 50-for-1 stock splitThe previous four-figure price for the stock is currently around $65.
Management felt it was the right move, given how well the restaurant company’s stock has performed, up 44% through 2024 and 348% over the past five years.
Is this beautiful? restaurant inventory an investment opportunity that seems obvious, right after the 50-for-1 stock split?
No fundamental changes
Stock splits typically occur after a company’s nominal share price gets too high. This is obviously a good problem for Chipotle, because it means the stock has performed well for investors over the years. But by artificially lowering the price, the stock can become more accessible to investors.
Chipotle’s outstanding shares have increased fiftyfold to 1.4 billion. And its stock price is now 1/50th of what it was before this event. It’s helpful to think of this situation as a pizza that gets cut into smaller slices.
It’s really important to remember that fundamentally, nothing has changed with Chipotle. This is still the same business it was yesterday. Through its fast-casual stores, it still sells Tex-Mex food like bowls and burritos.
Since the management team first announced the stock split in March, shares have risen 17%. Perhaps the anticipation of this event is exactly what has driven even greater bullish sentiment out of the market.
Curb your appetite
When looking at the company and its stock today to assess whether Chipotle is a no-brainer investment opportunity, it’s crucial to consider the quality of the company. This is a great company.
The company continues to deliver strong financial results despite persistent macro headwinds. After increasing 14.3% in 2023, sales rose 14.1% in Q1 2024 (ending March 31). This was driven by same-store sales growth of 7% and the opening of 47 new restaurants.
Chipotle is extremely profitable, which is supported by its proven pricing power. Over the past five years, the company has operating margin averages 11.5%. And from a retail perspective, 27.5% of turnover was converted into operating profit in the first quarter, an excellent figure.
There is still a lot of growth to be had. Management sees the potential to one day open 7,000 stores in North America, roughly double its current footprint. This target is up from the previous goal of 6,000, so it shows that the leadership team is extremely optimistic about Chipotle’s long-term prospects for further penetration of its core market.
All of these positive factors might make you think that this stock is a no-brainer buy. But consider how high expectations have become. Paying a price-to-earnings (P/E) ratio of 70.1 for this company’s stock seems crazy to me. There is no margin of safety for investors if the company reports quarterly results that the market doesn’t like for whatever reason.
Of course, unsustainable trends can last much longer than people think. And that could be the case with Chipotle stock, as it has been trading at a high valuation for a while.
Not only do I think the stock should be avoided, but I also don’t feel comfortable calling this a no-brainer investment opportunity at this point.. I might adopt this view if the P/E multiple were to fall below 30. But that might be a while off.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Is Chipotle a no-brainer buy right after the 50-for-1 stock split? The answer may surprise you. was originally published by The Motley Fool
