Up nearly 80% just since October's low, the idea of stepping into Chipotle Mexican Grill(NYSE: CMG) shares could be a bit intimidating. There may not be much -- if any -- upside left to tap. Indeed, profit-taking pressure could be in the near-term cards.
On the other hand, never say never. Shares of truly great companies can often do the unthinkable.
Is Chipotle stock that kind of stock? Probably.
Don't misread the message. An 80% romp in just a little more than six months is a tough act to follow. The stock's present price is also just a smidge shy of analysts' consensus price target of $3,214.61. These professional stock pickers don't seem interested in helping sustain the rally by adding to the froth.
But maybe they should be.
Chipotle Mexican Grill does all of it right
First things first. If you're not familiar, Chipotle Mexican Grill is a chain of Tex-Mex restaurants. Most of its patrons will opt for a burrito, although a few of them will choose a burrito bowl.
It's not exactly a new restaurant concept or flavor palette. Familiar names such as Qdoba and Moe's are near carbon copies, while fast-food chains like Taco Bell and sit-down eateries such as Chuy's can offer consumers a similar fix for their Mexican cravings. It's a relatively crowded arena.
And yet, Chipotle is clearly doing something better than most of its competitors. Last quarter's same-store sales were up 7% year over year. With the 47 new restaurants opened between then and now, its total top line improved 14.1%. These numbers extend well-established growth trends, which are also expected to be extended at least through 2028. Earnings are growing at an even faster clip.
Data source: StockAnalysis.com. Chart by author.
What gives?
It wouldn't be out of line to suggest Chipotle is a restaurant chain with a charming personality. It makes a point of sourcing ingredients without any added colors, hormones, flavors, or preservatives. It's also serious about doing everything it can to minimize its impact on the environment. Since 2021, the company has cut its landfill-bound waste by half. There's also no denying the restaurant chain's treatment of its employees is top-notch. This ultimately means its burritos are fresh, well-made, and tasty. These are all things consumers respond to these days.
The question remains: Is it too late to buy Chipotle stock?
Nope.
The case to buy Chipotle stock despite its steep price
Don't misread the message. There are reasonable arguments against buying the stock at this time.
One of them is the simple fact that Chipotle shares have become crazy expensive. The stock's priced at 57 times this year's projected per-share profits and more than 47 times next year's expected earnings of $66.69 per share. For comparison, McDonald's sports a forward-looking price-to-earnings ratio of 22, while Chuy's is right around 16. Chipotle Mexican Grill shares are clearly anything but bargain-priced.
The company is also facing the same soaring costs other restaurant chains, as well as consumers, are facing. This puts pressure on its operations and could keep would-be customers from setting foot in its stores in the first place.
Even so, Chipotle is finding ways to remain resilient. The company is embracing the use of artificial intelligence as a means of predicting consumers' habits. At the same time, it's testing robots to prepare and properly portion customers' purchases. Both ways help contain costs.
At the same time, its patrons are resilient too despite higher menu prices. The restaurant chain's first-quarter transaction count grew 5% year over year.
Take the hint (again): Chipotle Mexican Grill is clearly doing something right. It's doing something so right, in fact, that its expensive and overbought stock is worth paying a premium for.
That's not a call everyone will agree with. Plenty of investors and analysts alike simply can't stomach buying richly priced stocks like this one. If you're one of them, know this: Chipotle stock hasn't been valued at a trailing-price-to-earnings ratio of less than 43 at any point since early 2016. That hasn't prevented shares from more than quintupling during that time, in step with earnings growth. This is just one of those tech-like names that can do what doesn't seem possible for most other tickers. Give most of the credit to its well-loved burritos. The company's plans to double its store count to 7,000 doesn't seem far-fetched at all.
If you're stepping in, just brace for more of the above-average volatility you'd expect to see from such premium-priced growth stocks.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
