What Does Chipotle’s Stock Split Mean?

Until earlier this year, Chipotle Mexican Grill (NYSE:CMG) was one of America’s most expensive stocks. Reaching over $3,000 per share, the stock split in June on a 50-for-1 basis.

Although share prices continued to climb up to the date of the split, the ensuing month has seen CMG sell off fairly drastically. The stock is down 16.2% in the last month and has fallen to $53.55 at the time of this writing.

This raises several questions for investors, few of whom would likely have expected such a large selloff in the split’s aftermath. Just what does the Chipotle stock split mean for shareholders, and is the stock likely to make a comeback in the near future?

Does the Split Affect Chipotle’s Value?

Fundamentally, stock splits don’t change the intrinsic value of a company. Despite increasing the total number of shares, splits don’t alter the sales, net incomes, debts or other valuation factors of a business.

Each shareholder’s proportionate ownership also remains the same, as every share is simply divided into an equal number of smaller shares.

With that said, the selloff that followed the stock split has had a fairly sizeable impact on the company’s total market capitalization.

At its highest peak shortly before the split took place, Chipotle was valued at about $94.1 billion. Today, that number has fallen to $73.5 billion.

So Why Is Chipotle Down So Much?

The drop in Chipotle shares after the split is somewhat unusual as most recent stock splits have actually resulted in additional gains.

Though splitting a stock doesn’t affect the underlying value of the company, a post-split stock can be perceived as offering a cheaper entry point to investors, causing a slight bump in buying activity and driving share prices somewhat higher.

One possible explanation is that investors are taking the opportunity to sell some of the shares that were created by the split to realize profits on their longstanding investments in Chipotle.

Stock splits typically increase liquidity, and Chipotle’s 50-for-1 split may have had a larger impact in this area than the typical split. The company had held off on splitting shares for its entire history prior to this year, and the volume of shares created may have encouraged investors to sell a portion of their holdings.

It’s also possible that the market hasn’t had enough time to add gains to Chipotle yet. Even though stock splits can cause additional price increases, it usually doesn’t happen all at once.

Instead, shares gradually continue to appreciate over time, rising above the initial value ratios the stock held before the split took place. If this is the case, CMG may well still regain the ground it has lost and then some over the coming months or years.

Perhaps the most plausible explanation, though, is that the market could be self-correcting from a trend of increasing prices leading up to the split. The decision to split the stock was announced by management on March 19th. That day, CMG shares closed at $55.95, adjusted to reflect the post-split value of each share.

By market close on June 25th, the last day before the split, shares had risen to $65.66. As such, the market may simply be paring back some of the gains the stock made between when the split was announced and when it was executed.

It’s also useful to keep in mind the context of the full year so far. Even with shares off quite a bit since the split, CMG is still up over 17% YTD and 28.5% over the last 12 months. As such, the selloff represents a modest pullback after a period of exceptionally strong returns.

Is Chipotle a Buy After the Split?

The bullish view on Chipotle is backed up by the fact that the company’s trailing 12-month price-to-earnings and price-to-sales ratios have fallen significantly in the wake of the recent split. At the time of this writing, these ratios stand at 57.2 and 7.5, respectively.

For reference, Chipotle ended Q1 with a P/E ratio of 62.0 and a P/S ratio of 7.9. Though still reflecting high forward growth expectations, Chipotle is meaningfully cheaper by these metrics than it was at the end of the first quarter.

Speaking of Chipotle’s growth, there still appears to be a strong runway for the company going forward. Management is working toward the goal of eventually opening 7,000 locations, roughly double the current number.

On a 5-year horizon, analysts expect earnings per share to increase at a compounded rate of over 22.5%, setting the stage for continued appreciation of CMG shares.

Looking to analyst price forecasts, it’s also clear that Wall Street is still quite optimistic about Chipotle. At the median 12-month price target of $69, Chipotle would gain nearly 29% from its current level.

It’s especially noteworthy that the most bearish standing forecast is $57, about 6.5% above the current price. This indicates that CMG is trading well below Wall Street expectations and could be a prime candidate for a rebound later on.

Taking all of this into consideration, Chipotle could still be a good buy for investors who plan to buy and hold for multiple years. Though the company may not be able to keep delivering returns as large as it has for the past few years, Chipotle still appears to have the potential to produce compounding growth for several years to come.

What Does Chipotle’s Stock Split Mean?

Ultimately, Chipotle’s stock split isn’t likely to affect share prices very much on a long-term basis. Even with a buildup before the split and a selloff afterward, Chipotle’s intrinsic value remains unchanged. Over a long investment horizon, therefore, it’s unlikely that the stock split will have a substantial impact on returns.

The real story to focus on with CMG is its remaining potential for future earnings growth. As management continues to execute its growth strategy and earnings per share increase, it’s likely that shareholders who ride out the current volatility could see ongoing compounded returns from Chipotle.

---

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.