To The Moon

Another Split Committed.

$Chipotle Mexican Grill(CMG)$ recently joined the growing list of top companies to announce or complete stock splits.

The fast-casual chain executed its forward stock split late last month.

Shares began trading at their post-split price from 26 Jun 2024.

This represented a major move for Chipotle, as it marked the company's first-ever stock split and the 50-for-1 operation was one of the biggest in New York Stock Exchange history.

The restaurant chain decided on the move after its shares soared more than +300% over the past 5 years, reaching >$3,000 per share in recent times.

The split brought the price of each individual share down to about $60.

This makes the stock easier for a wider range of investors to access.

Stock split is just a mechanical operation, it does not change anything fundamental such as valuation or market value.

This means it is not a good idea to buy a stock just because it launched a stock split.

So, how does an investor approach the Chipotle investment opportunity ?

Below are 3 things to know & consider before buying or selling of this top restaurant chain’s shares.

1. Expansion Drive vs Revenue Growth.

Chipotle has progressively increased revenue over time, even during tough moments like the pandemic.

Then, it focused on its digital ordering platform, and this has kept diners coming back.

**Note: It is important to note that Chipotle is not seeing tremendous growth at its individual restaurants, year to year.

Instead, it is growing (mainly) by adding new restaurants.

Example, in the most recent quarter, total revenue climbed more than +14% to $2.7 billion.

But comparable restaurant sales only increased +7%.

And this is not a one-quarter thing, but an ongoing trend.

Of course, Chipotle still has quite a way to go in its expansion plan in North America.

It aims to expand to about 7,000 locations from the current 3,500 locations and it's on track to meet the goal.

So, there is room for more growth.

However, when it comes to comparable sales growth, the opportunity may be limited.

That could limit overall growth over time.

2. Chipotle’s Decent Moat.

A moat is defined as a competitive advantage that comes in many forms.

In the case of Chipotle, the company's moat is the brand it's established.

Promising fresh & quality ingredients and bringing back favorite recipes for a limited time.

Most recently, that involved adding Chicken al Pastor back to menus.

This has kept customers coming back to Chipotle over time and rushing to get there for these special menu items that won't be around for long.

It is particularly challenging to stay ahead of rivals in the fast food and fast-casual businesses, as new places pop up and people are always willing to at least give them a try.

Therefore, it is vital to build a relationship with customers over time to increase the potential for revenue growth moving forward.

Chipotle's moat is part of the reason investors were willing to pay thousands of dollars for one share earlier this year and at a high valuation (if I may say so).

The chain has proven it can be a favorite of customers for the long term, and this could keep revenue advancing.

3. Valuation.

Investors’ willingness to pay top dollar for access to Chipotle stock has not changed post-stock split.

CMG valuation

The shares trade for more than 55x forward earnings estimates, that is very high for a restaurant stock. (see above)

MacDonald valuation

Yum ! valuation

Although the businesses aren't exactly the same, for a rough comparison, fast food giants $McDonald's(MCD)$ and $Yum(YUM)$ trade for about 20x. (see aboves)

Although Chipotle may deserve a higher valuation than peers, the current level still looks pretty steep.

That could discourage some investors from buying the stock, especially if they consider the company's growth now and future prospects.

Buy or Sell - Now ?

Now comes the million dollar question - should you buy or sell Chipotle stock, now ?

The answer to this depends on an investor’s investment style.

Buy:

• If investor is seeking to diversify and want to add a strong restaurant player in portfolio, may consider buying a few Chipotle shares and holding on for the long term.

• Growth, even if not tremendous, is not over and the shares could climb from today's level over the long run.

• You could still win by buying now and holding on for a number of years.

• This is also why you may want to hold on to at least some of your Chipotle shares if you're currently a shareholder.

Sell:

• If you're a value investor.

• You will be “better off” (subjective) divesting Chipotle from your holdings now.

• The stock has become very expensive, meaning it's should not be a good fit for your strategy.

• You are likely to find a more appetizing choice elsewhere.

My viewpoints : (mine only)

• Again, one of the “rare” balanced post from Motley Fool.

• Writer has laid out the facts, pros and cons in a fuss-free style for easy appreciation.

• Chipotle share price has drifted -6.50% lower since 26 Jun 2024 (aftermath of split).

• On 26 Jun it was $65.86 per share. On 03 Jul it closed at $61.58 on the eve of Independence Day.

• Like $NVIDIA Corp(NVDA)$, the stock has been trending downwards - post split.

• Could it be (again like Nvidia), its stock price has appreciated quite a bit on the run up to the split exercise.

• Therefore, it is only natural to experience the pull back ?

• Plus, no doubt staff may have partially offload some of their holdings too in the process.

• It’s Q1 2024 quarterly earnings were good when reported on 24 Apr 2024.

• Earnings per share: $13.37 adjusted vs. $11.68 expected vs $10.56 per share YoY, that is a +27.30% gain.

• Revenue: $2.7 billion vs. $2.68 billion expected vs $2.37 billion YoY, making it a +13.92% gain.

• Net income: $359.3 million vs $291.6 million YoY, a +23.22% gain.

With all the “good” news intact. will you be taking a 2nd look at this gaming change restaurant chain?

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