The time has finally come. On June 16, shares of Chipotle Mexican Grill (NYSE: CMG) suffered a historic and very followed 50 for 1 stock split. The stock’s previous four-figure price currently sits at around $65.
Management felt this was the right proposal, given the good performance of the restaurant company’s stock. They will increase 44% in 2024 and, in the last five years, they have skyrocketed 348%.
Is this magnificent? restaurant stock An obvious investment opportunity right after its 50-for-1 stock split?
There are no fundamental changes
Stock splits typically occur after a company’s nominal share price rises too high. 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 become accessible to more investors.
The number of Chipotle shares outstanding multiplied by 50, reaching 1.4 billion. And the stock price is now 1/50th of what it was before this event. It is helpful to think of this situation as a pizza being cut into smaller portions.
It’s very important to remember that, from a fundamental perspective, nothing has changed at Chipotle. This is still the same business as yesterday. Through its fast-casual food stores, this company still sells Tex-Mex food such as bowls and burritos.
Since the executive team first announced the stock split in March, shares have risen 17%. Perhaps the anticipation of this happening is precisely what has fueled even greater bullish sentiment in the market.
Curb your appetite
When looking at the company and stock today to assess whether Chipotle is an obvious investment opportunity, it’s critical to consider the quality of the company. This is a stellar business.
The company continues to post strong financial results, despite ongoing macroeconomic headwinds. After revenues rose 14.3% in 2023, they increased 14.1% in the first quarter of 2024 (ended 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, which is supported by its proven pricing power. In the last five years, the company Operating margin has averaged 11.5%. And from a store-level perspective, 27.5% of revenue was converted into operating profit in the first quarter, an outstanding figure.
There is still a lot of growth to be achieved. Management sees the potential to have 7,000 stores open in North America one day, about double the current footprint. This target is higher than the previous target of 6,000, so it shows that the leadership team is extremely optimistic about Chipotle’s long-term prospects for further penetrating its key market.
All of these positive factors may lead you to believe that this stock is an obvious buying opportunity. However, consider how high expectations have become. It seems crazy 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 if the company releases quarterly financial results that the market is dissatisfied with for any reason.
Of course, unsustainable trends can last much longer than people think. And this could be the case for Chipotle stock, which has been trading at a high valuation for a while.
Not only do I think stocks should be avoided, but I also don’t feel comfortable calling this an obvious investment opportunity right now.. Perhaps if the P/E multiple fell below 30, I would adopt this view. However, this may not happen for a long time.
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Neil Patel and 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 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