Buy Chipotle Stock
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buy chipotle stock
With the stock market having a rough go in 2022, investors might be hesitant to put money to work right now. But this is the wrong mentality as there are some fine companies that deserve a closer look. Chipotle Mexican Grill (CMG 2.16%) fits the bill as a business that continues to perform well despite broad macroeconomic weakness.
During the five-year stretch between 2016 and 2021, Chipotle increased revenue at a compound annual growth rate (CAGR) of 14% with diluted earnings per share rising at a 97% rate. And same-store sales generated healthy gains as well, even coming in positive in pandemic-filled 2020. So it's no surprise that the stock has produced a stellar return of 402% over the past five years.
Despite Chipotle's track record of outstanding growth and profitability, coupled with a strong consumer brand, there is one very important reason that investors should hold off on buying the stock right now: valuation. Shares are currently trading at a steep price-to-earnings (P/E) ratio of 48. While that's well below the trailing 10-year average of 81, it is still expensive, even considering Chipotle's bright outlook over the next several years. The shares are also far pricier than the S&P 500 index's average P/E of 18.
If we look at the price-to-sales (P/S) metric, it doesn't paint a better picture. Chipotle's stock currently has a P/S ratio of 4.6, higher than other fast-growing restaurant peers like Sweetgreen and Shake Shack. This valuation for Chipotle certainly prices in a lot of optimism surrounding the trajectory of the business.
Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short January 2023 $92.50 puts on Starbucks. The Motley Fool has a disclosure policy.
This chart is not advice or a guarantee of success. Rather, it gauges the real-time recommendations of three popular technical indicators: moving averages, oscillators and pivots. Finder is not responsible for how your stock performs.
Valuing Chipotle Mexican Grill stock is incredibly difficult, and any metric has to be viewed as part of a bigger picture of Chipotle Mexican Grill's overall performance. However, analysts commonly use some key metrics to help gauge the value of a stock.
Chipotle Mexican Grill (CMG 2.16%) pioneered the fast-casual food category, serving customers quality Tex-Mex items made from responsibly-sourced ingredients. The stock, which has risen 176% over the past five years, showcases the company's remarkable success, something that will continue in the years ahead.
And even if we consider Chipotle's future growth plans, I don't see how owning the stock today provides any margin of safety. Let's say the company manages to reach its target of 7,000 stores in North America by the end of 2030. This would be an aggressive pace of expansion with an average of 450 new locations opened every year, something Chipotle has never done before.
Let's give the company the benefit of the doubt and forecast earnings per share will actually increase fourfold by 2030 (compared to 2021) with the 7,000 locations. If the stock's P/E ratio gets cut in half to 27 by 2030, in line with its peers today, Chipotle would provide an annualized return of about 8% between now and the end of this decade.
As you can see, the optimism surrounding Chipotle's stock is probably fully priced in already. Investors who purchase shares now would give themselves no margin of safety. Management could surprise to the upside by boosting expansion plans even further or penetrating more international markets. However, it's hard to underwrite this unknown scenario as an investor today.
Chipotle Mexican Grill's (NYSE: CMG) high stock price may send mixed signals to investors. While the high price is a sign of success, it has also put it on stock split watch as small investors hope that the shares become more affordable.
Nonetheless, a nominal stock price actually holds much less meaning for a stock than growth, earnings, and other metrics. Investors should focus on three factors that took Chipotle stock higher before, and will likely do so in the future.
However, it has built a long track record of success, a factor that may explain its lofty price-to-earnings (P/E) ratio of 62. This comes in well above those of other restaurant stocks, such as McDonald's at 31 times earnings, but investors should also remember that Chipotle has rarely sold for less than 50 times earnings over the last five years. Hence, it might not be as expensive as it might appear.
Admittedly, many investors probably want Chipotle to split its stock. But even if it never splits, Chipotle's healthy fast food concept is clearly a winner with consumers. As long as it can continue adding restaurants and capitalizing on its pricing power, Chipotle stock can continue rising, even with a high P/E ratio.
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