The time has finally come. On June 16, Shares of Chipotle Mexican Grill (NYSE: CMG) experienced 50-to-1 thoroughly and historically stock split. That means the previous four-digit stock price is now at $65.
Management feels this is the right proposal, given the restaurant company’s stock performance. They are up 44% in 2024, and over the past five years, they have increased by 348%.
Is this magnificent Restaurant savings A no-brainer investment opportunity right after a 50-to-1 stock split?
There are no fundamental changes
Stock splits usually occur after a company’s nominal share price becomes too high. Of course, this is a good problem for Chipotle because it means the stock has done well for investors over the years. But by artificially depressing the price, the stock is accessible to more investors.
Chipotle’s outstanding shares increased 50-fold to 1.4 billion. And the stock price is now 1/50th that before this event. It is useful to think of this situation as a pizza cut into small slices.
It is very important to remember that from a fundamental perspective, nothing has changed with Chipotle. It’s still the same business as yesterday. Through its fast-casual stores, the company still sells Tex-Mex food like bowls and burritos.
Since the executive team first announced the stock split in March, the stock has risen 17%. Perhaps the anticipation of this happening is what has led to greater bullish sentiment from the market.
Curb your appetite
As we look at the company and its stock today to assess whether Chipotle is a worthwhile investment opportunity, it’s important to consider the quality of the company. This is stellar business.
The company continues to deliver strong financial results, despite macro issues. After revenue increased by 14.3% in 2023, it increased by 14.1% in Q1 2024 (end March 31). This was driven by same-store sales growth of 7%, as well as the opening of 47 new restaurants.
Chipotle is extremely profitable, fueled by proven pricing power. In the past five years, the company operating margin has averaged 11.5%. And from a store-level perspective, 27.5% of revenue went into operating profit in the first quarter, a remarkable number.
There is still a lot of growth to be achieved. Management sees the potential to open 7,000 stores in North America a day, roughly doubling its current footprint. This goal is higher than the previous goal of 6,000, so it shows that the leadership team is very optimistic about the long-term prospects of Chipotle to break into the main market.
All these positive factors can make you believe that this stock is a no-nonsense buying opportunity. However, consider how high expectations have gotten. It seems wild to me to pay a price-to-earnings ratio (P/E) of 70.1 for shares of this business. There is no margin of safety for investors if a company delivers monthly financial results that the market does not like for any reason.
Of course, unsustainable trends can last longer than people think. And this may be the case with Chipotle’s stock, as it has been trading at steep valuations for some time.
Not only do I think the stock should be avoided, but I also hate to call it a worthless investment opportunity right now.. Maybe if the P/E range drops below 30, I’ll use this view. This may not happen for a long time, though.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has a position and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Is Buying Chipotle a No-Brainer After a 50-to-1 Stock Split? The Answer May Surprise You. this was originally published by The Motley Fool
