Finance
Is Chipotle a no-brainer buy right after the 50-for-1 stock split? The answer may surprise you.
The time has finally come. On June 16, the shares of Chipotle Mexican Grill (NYSE:CMG) suffered a closely watched and historic 50-for-1 stock split. The stock’s previous four-digit price tag is currently around $65.
Management believed this was the right proposal given how well the restaurant company’s stock has performed. They are up 44% in 2024 and 348% in the past five years.
Is this beautiful? restaurant inventory a no-brainer investment opportunity right after the 50-to-1 stock split?
No fundamental changes
Stock splits typically occur after a company’s nominal share price becomes too high. This is obviously a good problem for Chipotle to have, because it means the stock has done well for investors over the years. But by artificially lowering the price, the shares can become accessible to more investors.
Chipotle’s number of outstanding shares increased fiftyfold to 1.4 billion. And the stock price is now 1/50th of what it was before this event. It’s helpful to think of this situation as a pizza being cut into smaller slices.
It’s very important to remember that from a fundamental perspective, nothing has changed with Chipotle. This is still the same company as yesterday. Through its fast-casual stores, this company still sells Tex-Mex foods such as 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.
Limit 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 macroeconomic headwinds. After rising 14.3% in 2023, sales rose 14.1% in the first quarter of 2024 (ended March 31). This was driven 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. 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 achieved. Management sees the potential to one day open approximately 7,000 stores in North America double the current footprint. This goal is higher than the previous target of 6,000, so it shows that the leadership team is extremely optimistic about Chipotle’s long-term prospects for further penetrating its key market.
All of these positive factors may lead you to believe that this stock is a buying opportunity you shouldn’t miss. However, consider how high expectations have become. It seems wild to me to pay a price-to-earnings (P/E) ratio of 70.1 for this company’s stock. There is no margin of safety for investors if the company releases quarterly financial results that the market is not happy with for whatever reason.
Of course, unsustainable trends can last much longer than people might think. And this could be the case with Chipotle stock, as it has been trading at a steep valuation for some time.
Not only do I think the stock should be avoided, but I’m also uncomfortable calling this a no-brainer investment opportunity at this point. If the price-to-earnings ratio were to fall below 30, I might adopt this view. Although this may not happen for a long time.
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill. The Motley Fool has one 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
