Three Essential Truths to Consider Before Purchasing Chipotle Shares
Three Essential Truths to Consider Before Purchasing Chipotle Shares
Chipotle Mexican Grill (CMG, -0.79%) has dominated the market recently. Over the last five years, the company's shares have experienced a fourfold increase, which may come as a shock to those who believe such significant returns are exclusive to tech startups.
At the moment, the stock is trading 12% lower than its all-time high from earlier this year. This dip might encourage investors to buy shares. However, it's essential to familiarize yourself with three crucial facts about Chipotle before making any investments.
1. Unparalleled competitive edges
The restaurant industry is notorious for its intense competition. Barriers to entry are minimal, and it is simple for new restaurants to emerge. From the customer's perspective, switching costs are negligible. Consequently, building enduring competitive advantages is a significant challenge for companies in this sector.
However, Chipotle has excelled in this regard. The brand has established a strong presence in the industry, known for its freshly made, reasonably priced food. This standing has been partly achieved as a pioneer in the fast-casual movement.
Furthermore, Chipotle has demonstrated pricing power by successfully increasing its menu prices in response to inflationary pressures on expenses. This reflects the strength of its brand. Customers appreciate the value they receive and the consistent quality of the product.
Moreover, as a larger player with 3,615 locations, Chipotle enjoys scale benefits that smaller competitors lack. The company can invest more in its supply chain, marketing, or digital capabilities, which positively impacts its extensive store network. Additionally, Chipotle's proven model provides it with an edge when securing prime real estate for new locations.
2. Robust growth prospects
Chipotle's long-term growth trends are difficult to overlook. In the past five years, revenue has surged at a 15% compound annual growth rate (CAGR). Even during the challenging year of 2020, when the restaurant industry was adversely affected by the COVID-19 pandemic, Chipotle managed to boost its sales by 7.1%. The company's digital capabilities played a crucial role in serving customers during this period.
Chipotle is also a highly profitable business, posting an operating margin of 16.9% in the last quarter. Net income has soared at an annualized pace of 31.5% over the past five years.
In fact, the increasing bottom line surpasses the top line growth, indicating that Chipotle has grown in a highly profitable manner. This is particularly evident in its improved management of various expense items.
Looking ahead, management is optimistic about Chipotle's potential. They believe the company could eventually have 7,000 stores in North America, nearly doubling its current footprint. In 2025, they anticipate opening 330 new stores (at the midpoint).
This pace of expansion suggests future revenue and earnings growth. If the ambitious goal becomes a reality, Chipotle's revenue and earnings will increase significantly.
3. Current valuation
Investing in Chipotle has proved to be highly rewarding, as shares have gained over 300% in the past five years. That $10,000 investment would now be worth over $40,000.
Despite the stock's 12% dip from its high, it is currently expensive. Investors can purchase shares at a price-to-earnings (P/E) ratio of 56.1.
On the one hand, this is a 121% premium compared to the overall S&P 500 (^GSPC -0.39%). Moreover, paying such a high valuation for any business might seem challenging, given that it reflects considerable optimism about the future in the stock price.
On the other hand, Chipotle's impressive bottom-line gains are challenging to ignore. Some investors might view this performance as justification for the high valuation.
While Chipotle's current valuation with a P/E ratio of 56.1 might seem high, considering its robust growth and impressive net income increase, some investors may find justification in purchasing its shares due to its promising future prospects. If you have spare money in your finance portfolio and are considering investing in stocks, Chipotle's strong competitive edges and growth potential might make it an attractive option in the money market.