Will Chipotle Stock Fall?

Companies that can maintain a significant capital growth appreciation arc over the long term are often considered the most valuable assets in any investor’s portfolio. And while only a small number of businesses actually achieve that, a rare few do.

For example, Chipotle Mexican Grill has seen its share price expand 359% during the last five years, easily beating the S&P 500, which has only managed a 63.7% return since 2018.

However, Chipotle shareholders don’t have to look so far over their shoulders for good news – the stock is up a staggering 52.8% already this year, with little sign of its momentum slowing down.

But why would a humble burrito outlet be leaving the rest of the market for dead? And more importantly: if the stock is overvalued, will Chipotle stock fall?

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Market Tailwinds

In the bustling environment of the restaurant industry – where competition is as fiery as the dishes it serves – companies are constantly searching for the next big thing. And one such culinary adventurer happens to be Chipotle Mexican Grill, which has recently unfurled its sails for an exciting voyage into the Middle East.

As a dominant force in the fast-casual dining industry, the enterprise is celebrated for its mouthwatering Mexican cuisine, forging an extraordinary path of expansion since its establishment in 1993.

Commencing with just 481 establishments in 2005, the company presently commands an extensive suite of real estate, encompassing 3,187 eateries at the end of fiscal 2022, primarily concentrated within the borders of the United States.

Furthermore, Chipotle has successfully ventured into global markets, with a varied assortment of locations spread across countries, including Canada, the United Kingdom, Germany, and France. This expansion has been the rocket fuel propelling the company’s stock performance, with shares skyrocketing over 4,400% since its 2006 IPO.

However, the company’s recent announcement of its Middle Eastern expedition marks a significant pivot in its business strategy. Until now, all Chipotle locations have been company-owned, but this Middle Eastern adventure, in partnership with the Kuwaiti company Alshaya Group, represents its maiden voyage into franchising. This strategic shift allows Chipotle to explore new geographic horizons and experiment with a novel business model.

And yet, franchising is a double-edged sword, offering both opportunities and challenges. On one side, it smooths the way for rapid expansion with lower capital expenditure, as the franchisee shoulders the bulk of the investment and operational costs. On the flip side, the company’s revenue from franchised locations is derived from franchise fees, typically a mere fraction of direct sales revenue. However, these fees usually boast higher margins, which could spice up Chipotle’s bottom line.

The inaugural Chipotle branches in the Middle Eastern region, specifically in the United Arab Emirates and Kuwait, are scheduled to commence operations in early 2024. Although this may not instantly add zest to the company’s financial performance, it is a strategic move to broaden its revenue sources and explore avenues for growth in untapped markets.

Chipotle’s foray into franchising could be the key to unlocking the gate to further international expansion. The company has also announced the establishment of a new business development group division to scout for future franchise agreements, likely in other foreign territories.

CMG Recent Earnings Results

During the initial quarter of 2023, Chipotle Mexican Grill announced a truly remarkable 17.2% growth in revenue compared to the previous year, with digital sales – considered the cutting-edge domain of the food and beverage sector – constituting a whopping 39.3% of its overall sales.

This growth rate is well above 2022’s topline improvement of 14.4%, a feat that’s nothing short of remarkable for a restaurant chain. The company’s adjusted earnings per share also saw a meteoric rise, surging 84% year-on-year through the period, partly fueled by the dip in avocado prices and a tight leash on cost controls. This continues the company’s trend of robust earnings growth in recent years.

Unfortunately, Chipotle’s trailing twelve-month non-GAAP forward price-to-earnings (PE) ratio currently stands at a lofty 55.7x, towering over the average Consumer Discretionary stock’s own PE multiple of 13.3x.

That said, the corporation can boast a breathtaking return on total capital, which has spiked to 14.3% on a TTM basis. With the sector median currently standing at 6.15%, CMG is demonstrating an uncanny ability to use its cash resources in a highly profitable manner.

However, Chipotle’s tale of triumph extends beyond its current establishments. In the previous quarter, the company successfully incorporated 41 fresh additions to its culinary universe, elevating its overall presence to encompass more than 3,200 outlets.

And finally, the management also exhibits a confident outlook regarding the company’s expansion prospects, envisioning the potential to widen its North American footprint alone to an astonishing 7,000 establishments.

Will Chipotle Stock Fall?

While it is true that Chipotle’s valuation is undeniably elevated, the company’s determined aspirations for expansion – both within its domestic market and on a global scale – and its venture into franchising indicate a calculated shift in strategy that has the potential to drive additional advancements in the company’s stock value.

Moreover, as the firm spices up its growth recipe with new locations and innovative business strategies, it stands to deliver an irresistible mix of growth and profitability in the coming years.

Ultimately, Chipotle’s journey is a testament to the power of strategic thinking, operational efficiency, and digital innovation. As the company navigates the dynamic landscape of the restaurant industry, it remains a compelling investment proposition for those seeking a blend of growth and resilience.

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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.