Achi news desk-
When its fourth quarter 2023 financials were released almost two months ago, Chipotle Mexican Grill (NYSE: CMG) announcing results that easily beat Wall Street estimates. But more recently, shareholders are excited about a new development.
On March 19, the Tex-Mex a restaurant issue chain and a massive 50-for-1 stock split. Since then, shares have climbed about 4% (as of April 2), and are up 27% this year. There is clearly strong investor interest in this stock at the moment, driving more momentum.
Shareholders will vote on the stock split in June at the annual meeting. Does its pending approval make Chipotle a once-in-a-generation investment opportunity?
Cut the burrito into smaller pieces
It is essential to first understand what exactly a stock split is. Typically, if the shares of a business perform well, as has happened with Chipotle, the price rises to an extremely high level. Executives want to lower the price, so they issue a stock split. Lower nominal stock prices may be more attractive to smaller investors because they can acquire more whole shares, rather than having to buy fractional shares as some brokers allow.
If this were to be approved, each shareholder will receive 49 new shares of Chipotle stock for every one they already own. As a result, there will be 50 times more outstanding shares trading at 1/50th the price.
However, at the end of the day, nothing changes with Chipotle on a fundamental level. A stock split will not change management strategy or change revenue and earnings paths.
Is Chipotle stock a buy?
Now that we’ve established the details of Chipotle’s stock split, it’s time to turn our attention to the question of whether or not shares are a smart buying opportunity right now. There are some important factors that we need to consider.
There is no doubt that the company continues to fire on all cylinders. Chipotle reported revenue and earnings per share growth of 14.3% and 38.4%, respectively, in 2023. These two headline figures are significantly higher than they were five years ago. Chipotle’s results maintain strong financial performance despite continued macroeconomic uncertainty.
Key to the company’s strategy, new restaurant openings are unsurprisingly aggressive. There are currently 3,437 Chipotle locations (as of December 31, 2023), up 250 from 12 months earlier. The success of the drive-through establishments, known as Chipotlanes, is notable. Managers report that these locations increase new restaurant sales, profits and returns. They also help strengthen Chipotle’s digital presence.
Over the long term, executives believe there may be 7,000 stores in North America, roughly double the footprint today. It is hoped that these restaurants can generate $4 million in annual sales, up from $3 million in Q4. These prospects certainly make bullish shareholders very happy.
But investors need to realize that just because a business is posting tremendous results and has bright growth prospects, it doesn’t necessarily mean the stock is a foolproof buy. Pricing is the missing ingredient that must be scrutinized carefully.
After shares increased 311% in the past five years, Chipotle is very expensive today. The stock is trading at a dizzying pace price-to-earnings ratio of 65.5. Even with impressive fundamentals and a lofty store opening target, the valuation is in nosebleed territory. There is literally no margin of safety for potential investors, as Chipotle is priced for perfection right now.
A significant stock split of 50-for-1 definitely draws the attention of investors. However, that doesn’t make Chipotle a once-in-a-generation investment opportunity. Investors should not buy the stock at this time. Instead, they should wait for a major pullback before even considering adding the business to their portfolios.
Should you invest $1,000 in Chipotle Mexican Grill right now?
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool ranks and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Is Chipotle a Once-in-a-Generation Investment Opportunity ahead of its 50-for-1 Stock Split? originally published by The Motley Fool
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