Is Chipotle A Good Stock To Buy?

Chipotle Mexican Grill (NYSE:CMG) is one of the fastest-growing restaurant chains in North America. The fast-casual company has successfully tapped into the Millennial market while rapidly expanding its footprint.

As a result, Chipotle has attracted the attention of retail investors and billionaire hedge fund managers alike. Even Bill Ackman, the noted founder of Pershing Square Capital, has put over $1.5 billion into the stock. 

Can Chipotle Grow Revenues?

In FY2022, Chipotle saw its revenues increase by 14.4 percent, while comparable restaurant sales rose 8 percent. Q4 revenue was $2.2 billion, more than 11 percent higher than the same period in 2021. For the full year, Chipotle generated revenues of $8.6 billion.

While Chipotle’s revenue growth in 2022 was impressive, its earnings rose by an even larger percentage. Diluted EPS for the full year totaled $32.04, nearly 40 percent above reported EPS for FY2021.

Although Q4 earnings missed the analyst consensus estimate, Chipotle’s earnings outperformed expectations in the other three quarters of 2022. The company’s operating margin also rose from 10.7 percent in FY2021 to 13.4 percent in 2022.

2022 was also a banner year for Chipotle in terms of executing its long-term expansion plans. The company opened 236 new restaurants during the year, including 100 in Q4 alone. Management plans to open 250 or more restaurants in 2023. Eventually, the top brass envisions some 7,000 locations spread across North America.

Another key component of Chipotle’s long-term growth strategy is its so-called “Chipotlane” feature. This drive-thru lane allows customers to place their orders via the company’s mobile app before picking up their food.

In 2022, digital sales accounted for 39.4 percent of the company’s total revenue. Additionally, 90 of the 100 restaurants opened in Q4 included a Chipotlane.

Over the next year, Chipotle’s earnings are expected to rise more than 20 percent. This growth rate is expected to continue largely uninterrupted over the next five years as management opens new restaurants and pushes initiatives to improve average unit volumes. As such, Chipotle could still have a great deal of room to run before it begins to plateau.

Is Chipotle Stock Overpriced or Undervalued?

Chipotle maintains an almost universally bullish attitude among analysts. Their consensus fair value price for the stock is $1,833, up 24.1 percent from the most recent price of $1,477.03. Chipotle also has a fairly strong buy rating, with 21 out of 34 analysts rating the stock as a buy.

Due to its strong future growth prospects, Chipotle does trade at a multiple of 35.6x earnings. The company is also valued at over 17 times its book value and nearly 5 times its sales. While this would normally make Chipotle an unattractive value proposition, the company could more than justify its current valuation if management’s long-term growth plans come to fruition.

Unlike many rapidly growing businesses, Chipotle also has the advantage of carrying no long-term debt. This makes the business far more resistant to macroeconomic headwinds and interest rate hikes.

Will Chipotle Stock Fall?

Arguably the most crucial risk factor for Chipotle investors is the fact that the stock’s price reflects high future growth expectations.

The company will have to open several thousand more restaurants to reach the goal of 7,000 locations. If circumstances prevent this growth from continuing as planned, investors could find themselves holding shares that are fundamentally overvalued.

Chipotle also appears to be pricing itself out of customers with price hikes meant to counter inflation. Low-income diners may be visiting Chipotle less often, resulting in fewer overall transactions.

While this trend hasn’t stopped the company from raising revenue and earnings, persistent inflation could cause further price increases that may have larger effects. The flipside is a company with strong pricing power that doesn’t curtail demand has all the hallmarks of a firm with a sustainable competitive advantage.

Finally, while average unit volumes are improving, Chipotle still seems to lag behind several of its competitors in this area. Chipotle’s AUV reached $2.8 million in 2022, a high for the company.

For reference, Chick-fil-A generates over $8 million per location on average. McDonald’s, which prices its menu items at a much lower level than Chipotle, manages about $3.3 million per location. Low AUVs could be a critical weakness for Chipotle, as it will have to open, staff and maintain more locations to generate the same overall revenues as other chains.

Is Chipotle a Good Stock To Buy?

Overall, Chipotle appears to be an attractive investment opportunity, albeit one that is dependent on some optimistic growth assumptions. If management can successfully expand the chain as planned and continue raising AUVs at a steady pace, the stock could see very favorable returns over the next several years.

A key part of the investment thesis for Chipotle is the fact that the company owns and operates all of its restaurants. This makes it one of the largest non-franchise fast-food chains of its type. While chains like McDonald’s have thrived on the low-cost franchise model, Chipotle enjoys much more direct control of its restaurants and may be able to perform better over time as a result.

The restaurant’s popularity among younger diners is also extremely important in supporting the thesis for Chipotle. Market research suggests that the average Chipotle customer is 25-34 years old and spends roughly $150 per year at the chain.

This large and increasingly economically successful demographic will likely be a very favorable customer base for Chipotle going forward. These younger diners are also more likely to take advantage of innovative service models like the Chipotlane.

Despite somewhat low per-restaurant sales and a premium valuation, Chipotle’s risks seem to be reasonable given its potential returns. Chipotle appears to be a solid potential buy with a strong thesis behind it. Investors seeking growth in the fast-food industry will likely want to take a careful look at Chipotle as a potential up-and-coming winner.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.