The time has finally come. On June 16, the actions of Chipotle Mexican Grill (NYSE:CMG) has undergone close and historical surveillance of 50 to 1 stock splitThe stock’s previous four-digit price currently stands at around $65.
Management felt it was the right proposition, given the restaurant company’s stock’s strong performance. They rose 44% in 2024 and are up 348% over the past five years.
Is it beautiful restaurant stock an obvious investment opportunity right after its 50-for-1 stock split?
No fundamental changes
Stock splits typically occur when the nominal price of a company’s stock becomes too high. Of course, this is a positive 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 accessible to more investors.
Chipotle’s outstanding shares have increased 50-fold to 1.4 billion. And its stock price is now 1/50th of what it was before this event. It helps to think of this situation as a pizza cut into smaller slices.
It’s really important to remember that fundamentally, nothing has changed with Chipotle. It’s still the same business it was yesterday. Through its fast-casual stores, it still sells Tex-Mex food like bowls and burritos.
Since management first announced the stock split in March, shares have soared 17%. Perhaps it is precisely the anticipation of this phenomenon that has sparked even more bullish sentiment in the market.
Cut your appetite
As we look at the company and its shares today to assess whether Chipotle is a clear investment opportunity, it is essential to consider the quality of the company. This is a stellar company.
The company continues to post strong financial results, despite persistent macroeconomic headwinds. After recording an increase of 14.3% in its turnover in 2023, it increased by 14.1% in the first quarter of 2024 (ended March 31). This increase was driven by same-store sales growth of 7%, as well as the opening of 47 new restaurants.
Chipotle is extremely profitable, which is supported by its proven pricing power. Over the past five years, the company operating margin reached an average of 11.5%. And from a store perspective, 27.5% of sales turned into operating profit in the first quarter, an exceptional figure.
There is still plenty of growth to be achieved. Management sees the potential to open 7,000 stores in North America one day, or about double the current footprint. This target is higher than the previous target of 6,000, showing that the management team is extremely optimistic about Chipotle’s long-term prospects of further penetrating its key market.
All of these positive factors might make you believe that this stock is a clear buying opportunity. However, consider how high expectations have become. It seems foolish to me to pay a price-to-earnings (PE) ratio of 70.1 for this company’s shares. There is no margin of safety for investors if the company reports quarterly financial results that fail to please the market for one reason or another.
Of course, unsustainable trends can last much longer than one might think. And that could be the case with Chipotle stock, as it has been trading at a high valuation for some time.
Not only do I think the stock should be avoided, but I’m also not comfortable calling this an obvious investment opportunity at this time.. Perhaps if the P/E multiple fell below 30, I would adopt this view. But that may not happen for a long time.
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Neil Patel and its clients have no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Is Chipotle an obvious buy right after its 50-for-1 stock split? The answer might surprise you. was originally published by The Motley Fool
