Chipotle Stock Is Up 39% This Year. What’s Happening With The Company?

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CMG: Chipotle Mexican Grill logo
CMG
Chipotle Mexican Grill

After a 39% increase since the beginning of this year, at the current price of around $3173 per share, we believe Chipotle Mexican Grill stock (NYSE: CMG), a fast-casual restaurant chain that focuses on fresh and organic ingredients in burritos, salads, and more – could see moderate declines. CMG stock has increased from around $2287 to $3173 YTD, largely outperforming the broader indices, with the S&P growing about 12% over the same period. CMG’s stock growth can be attributed to Chipotle’s strong financial performance and the recent 50-for-1 stock split announcement. CMG’s positive performance can be attributed to restaurant-level operating margin expansion, menu innovation, price increases, and good execution of the company’s digital strategies. It should be noted that CMG shares are still trading at a premium valuation of 68x forward price-to-earnings ratio. This compares to a P/E ratio of 23x for McDonald’s (NYSE: MCD) and 21x for Starbucks (NYSE: SBUX).

CMG stock has seen extremely strong gains of 130% from levels of $1385 in early January 2021 to around $3173 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. However, the increase in CMG stock has been far from consistent. Returns for the stock were 26% in 2021, -21% in 2022, and 65% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that CMG underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CMG face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

We have updated our model following the Q1 release. We forecast Chipotle’s Revenues to be $11.4 billion for the fiscal year 2024, up 15% y-o-y. Looking at the bottom line, we now forecast the earnings per share to come in at $55.65. Given the changes to our revenues and EPS forecast, we have revised our Chipotle’s Valuation to $2794 per share, based on a $55.65 expected EPS and a 50.2x P/E multiple for the fiscal year 2024 – almost 12% lower than the current market price. Below we talk about why we think Chipotle’s business is still worthy of such a premium (~50x).

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In the fiercely competitive restaurant industry, how does Chipotle stand out?

  • To begin with, Chipotle has remarkable store economics. Its average restaurant sales rose 7% year-over-year (y-o-y) to $3.1 million in Q1, despite adding 47 new restaurants over the same period – illustrating that the additions are not cannibalizing existing locations. It continues to post healthy sales and profitability growth in the first quarter, which is a big step in the right direction for the popular Tex-Mex chain. In Q1, Chipotle’s revenue grew 14% y-o-y to $2.7 billion, on the back of 7% growth in comparable restaurant sales (outlets in operation for 13 calendar months at a minimum). In addition, the company’s earnings per share rose 27% y-o-y to $13.37 in Q1.
  • Digital sales continue to be strong at almost 37% of the core food and beverage business in Q1, despite the return of in-person dining. Chipotle’s highest-margin sales are digital orders, so momentum on this front serves the business well for continued profit growth in the long run.
  • Food, beverage, and packaging costs were down 40 bps to 28.8% of sales in Q1. The decrease was primarily due to menu price increases from October 2023, partially offset by inflation across several ingredient costs, primarily beef and produce, and a protein mix headwind from the successful Braised Beef Barbacoa marketing initiative. As a result, Chipotle’s restaurant-level operating margin grew 190 basis points to 27.5% in Q1.
  • Chipotle’s rewards program (launched in Q1 2019) is gaining steam with an outstanding 40 million members (as of Q1 2024), wherein each purchase wins points that can be redeemed for food. In comparison, Starbucks, which introduced its world-class rewards program more than a decade in advance of Chipotle, has 33 million members in the U.S in FQ2 2024 ending April.
  • And lastly, the company’s drive-thru option Chipotlane helps the new restaurants generate sales and margins. As such, out of the 47 new stores that opened in Q1, 43 were built with a Chipotlane.
  • For full-year 2024, Chipotle is forecasting mid-to-high single-digit growth in comparable restaurant sales assuming current sales trends continue. In 2024, it counts on opening 285 to 315 new restaurants with over 80% having Chipotlane.

Chipotle’s stock split will be subject to shareholder approval at Chipotle’s annual meeting on June 6. If approvedshareholders on record as of June 18 will receive an additional 49 shares for each share held after market close on June 25. While the stock split won’t change the value of Chipotle’s business, it would bring current share prices down from nearly $3,173 (as of writing) to about $63. That means – for each share of Chipotle stock an investor owns, post-split shareholders will own 50 shares worth ~$63 each.

While CMG stock looks poised for more gains in the future, it is helpful to see how its peers stack up. Check out how Chipotle’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns May 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 CMG Return 0% 39% 741%
 S&P 500 Return 6% 12% 138%
 Trefis Reinforced Value Portfolio 7% 6% 656%

[1] Returns as of 5/22/2024
[2] Cumulative total returns since the end of 2016

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