Chipotle Mexican Grill (NYSE:CMG) stock has undoubtedly been a long-term winner. The Mexican-cuisine quick-service restaurant (QSR) chain has seen its stock price rise by a remarkable 67.5% year-to-date and an extraordinary 5,000%+ since its 2006 IPO. While the recent surge may raise concerns about overvaluation, the stock’s consistent track record of reaching all-time highs suggests that exiting now could be a costly decision for investors. Accordingly, I remain bullish on the stock.
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Q3-2023 Results Sustain Bullish Investor Sentiment
The bullish sentiment driving Chipotle’s shares upward is largely due to the company consistently delivering outstanding results. Its Q3-2023 report was no different, with total revenues growing by 11.3% to $2.5 billion. Chipotle’s ability to maintain double-digit growth quarter after quarter is truly commendable.
This quarter’s success can once again be attributed to Chipotle’s straightforward yet effective strategy: expanding its footprint by opening new locations and driving increased sales in existing ones. Specifically, comparable sales growth from existing locations was 5.0% for the quarter. Also, at the end of September, Chipotle had 3,321 locations, up from 3,090 in Q3 2022.
Another highlight in Chipotle’s third-quarter report was the company’s earnings growth. Continuously expanding its restaurant count and bolstering comparable store sales, Chipotle showcases a strong track record of enhancing unit economics. To simplify, as sales at each location increase while fixed costs, such as rent, remain steady, the restaurant-level operating margin experiences a positive surge.
In the third quarter alone, Chipotle recorded an average restaurant sales figure of $2.972 million, marking an increase from $2.796 million in the corresponding period of the previous year. Consequently, Chipotle achieved an impressive 100 basis points uptick in its restaurant-level operating margin, reaching 26.3%.
Moving to the bottom line, it’s worth noting that many companies in the QSR space face headwinds from rising interest rates on their notable borrowings. For instance, McDonald’s (NYSE:MCD), Restaurant Brands International (NYSE:QSR), and Yum! Brands (NYSE:YUM), feature total debt positions of $49.9 billion, $14.4 billion, and $12.3 billion, respectively.
In contrast, Chipotle’s lack of debt on its balance sheet (long-term liabilities comprise just leases) not only didn’t end up being a headwind for the company’s profitability, but Chipotle’s growing cash position even resulted in the company profiting from growing interest income as a result of rising interest rates. In Q3, interest income rose to $18.4 million, up from $3.7 million last year.
The blend of Chipotle’s rising revenues, expanding restaurant margins, growing interest income, and a slight decline in the share count due to $712.9 million in share buybacks over the past four quarters led to earnings per share jumping by 23% to $11.32.
Growth + Quality = Premium Valuation
As previously highlighted, Chipotle’s consistent and robust double-digit growth has played a pivotal role in fostering a bullish sentiment among Wall Street investors. When paired with the distinctive qualities that set Chipotle apart, this creates a compelling combination that investors are more than willing to pay a premium for.
By qualities, I specifically refer to the advantages that come from Chipotle’s strategic decision to own all of its restaurants rather than opting for a franchising model. This ownership structure allows the company to enforce consistent food quality standards, implement standardized operational procedures, and set a uniform employee training program across all locations.
While the franchising model boasts substantial benefits, such as effortlessly earning high-margin royalties without the operational challenges of overseeing each individual location, Chipotle has opted for a more challenging path. However, this decision brings its own distinctive advantages and opportunities.
By exercising direct oversight of its restaurants, Chipotle can safeguard its brand image and identity, ensuring a cohesive experience for customers. Additionally, this centralized model improves Chipotle’s adaptability and innovation, enabling it to respond swiftly to market trends and consumer preferences.
Based on this, you can see why investors are willing to pay a hefty premium for the stock. Chipotle is now trading at about 52 times this year’s anticipated EPS, which may appear exorbitant at first glance. Yet, when one considers Chipotle’s consistent annual EPS growth of over 20% and the outstanding overall growth prospects (especially considering the company’s untapped potential in Europe), the recent rally and seemingly high valuation do not provide compelling grounds to sell the stock.
Is CMG Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, Chipotle Mexican Grill features a Strong Buy consensus rating despite its exuberant rally. This is based on 15 Buys and five Hold ratings assigned in the past three months. Nevertheless, at $2188.88, the average CMG stock price target implies 4.7% downside potential.
If you’re wondering which analyst you should follow if you want to buy and sell CMG stock, the most profitable analyst covering the stock (on a one-year timeframe) is Eric Gonzalez from KeyBanc, with an average return of 33.29% per rating and an 86% success rate. Click on the image below to learn more.
The Takeaway
Chipotle Mexican Grill’s remarkable year-to-date rally and exceptional long-term performance underscore its status as a winning stock. The company’s most recent Q3-2023 results, marked by impressive revenue growth, expanding margins, and a healthy balance sheet, contribute to the continuing bullish sentiment among investors.
Despite lingering concerns regarding overvaluation, Chipotle’s robust strategic advantages and untapped growth potential, especially in the European market, render it exceptionally challenging to entertain the notion of divesting from the stock. Opting to trade the stock solely based on valuation might inadvertently lead to missing noteworthy gains, a lesson learned by those who acted on perceived overvaluation concerns in the past. Thus, I choose to remain bullish on this soaring rocket.
