Is Chipotle a No-Brainer Buy Right After Its 50-for-1 Stock Split? The Answer Might Surprise You.
The time has finally come. On June 16, shares rose Chipotle Mexican Grill (NYSE: CMG) Closely watched and historically 50 to 1 stock splitThe former four-figure stock price is currently around $65.
Management felt this was the right proposal, given the good performance of the restaurant company’s stock. They are up 44% in 2024, and in the past five years, they are up 348%.
Is this cool? Restaurant Stock A no-brainer investment opportunity right after a 50-for-1 stock split?
No fundamental changes
Stock splits typically occur after the nominal price of a company’s stock rises significantly. Of course, this is a good problem for Chipotle because it means the stock has performed well for investors over the years. But by artificially lowering the price, the stock can be made more accessible to more investors.
Chipotle’s outstanding shares expanded 50-fold to 1.4 billion. The stock price is now 1/50 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 really important to remember that from a fundamental perspective, nothing has changed with Chipotle. This business is still the same as it was yesterday. Through its grab-and-go stores, this company still sells Tex-Mex food like bowls and burritos.
Since the executive team first announced the stock split in March, shares have risen 17%. Perhaps it’s precisely the anticipation of that happening that has fueled further bullish sentiment in the market.
Curb your appetite
As we look at the company and stock today to assess whether Chipotle is a no-brainer investment opportunity, it’s important to consider the quality of the company. This is an excellent business.
The company continues to deliver strong financial results, despite persistent macro headwinds. After revenues jumped 14.3% in 2023, they rose 14.1% in the first quarter of 2024 (ending March 31). This was boosted by same-store sales growth of 7%, as well as the opening of 47 new restaurants.
Chipotle has tremendous profits, which is supported by its proven pricing power. In the past five years, the company has achieved 100% sales growth. Operating Margin The average was 11.5%. From a store level perspective, 27.5% of revenues turned into operating profit in the first quarter, which is a great number.
There is still a lot of growth to be achieved. Management sees the potential to open 7,000 stores in North America one day, which is about Double the current footprintThis target is higher than the previous target of 6,000, so it shows you that the leadership team is very optimistic about Chipotle’s long-term prospects for continuing to penetrate its core market.
All of these positive factors might make you think this stock is an easy buy. However, consider how high the expectations are. It seems strange 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 in case the company reports quarterly financial results that the market is not happy with for whatever reason.
Of course, unsustainable trends can last much longer than people realize. That may be the case with Chipotle stock, which has been trading at a high valuation for a while.
Not only do I think the stock should be avoided, but I’m also uncomfortable calling this a no-brainer investment opportunity right now.. Maybe if the P/E drops below 30, I’ll adopt that view. But this may not happen for a long time.
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Neil Patel His clients have no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has Disclosure Policy.
Is Chipotle a must-have stock after its 50-for-1 stock split? The answer may surprise you. Originally published by The Motley Fool
