Chipotle Mexican Grill(NYSE: CMG) has crushed the market. In the past five years, shares have quadrupled, a gain that might come as a surprise to investors believing this kind of return can only come from technology enterprises.
As of this writing, though, this restaurant stock trades 12% off its all-time high from earlier this year. This dip might prompt investors to buy shares. But before doing so, here are three must-know facts about Chipotle.
1. Its competitive strengths
The restaurant sector is without a doubt one of the most competitive markets in the world. There are virtually no barriers to entry for new restaurants to pop up. And for customers, switching costs are nonexistent. This unfavorable reality means that it's very hard for companies to develop lasting competitive strengths.
Here's where Chipotle really stands out. I'd argue that the company has built up a strong brand in the industry that's known for freshly prepared food at reasonable prices. This brand positioning has partly come from being a fast-casual pioneer.
Moreover, the fact that the business has proven pricing power, by successfully raising menu prices in recent years to offset the negative impacts of inflation on expenses, is proof that its brand is a key advantage. Consumers know they're getting a good value and a consistent product.
With 3,615 stores in total, Chipotle also certainly has scale benefits that smaller rivals don't. The company can make greater investments in its supply chain, marketing, or digital capabilities that can benefit a huge store footprint. Plus, Chipotle's proven model can give it access to favorable real estate sites when opening new locations.
2. Strong growth trends
Chipotle's long-term fundamental trends are hard to ignore. In the past five years, between Q3 2019 to Q3 2024, revenue increased at a compound annual rate of 15%. What's impressive is that even in 2020, a year that saw the restaurant industry hammered due to the onset of the COVID-19 pandemic, Chipotle's sales still rose a healthy 7.1%. It was hardly impacted at all by the health crisis, leaning on its digital capabilities to serve hungry customers.
The business is also extremely profitable, posting a strong operating margin of 16.9% in the three-month period that ended Sept. 30. Net income has soared at an annualized pace of 31.5% in the past five years.
The fact that the bottom line has increased at a much faster clip than the top line is a clear sign that the business scaled up in an extremely profitable manner. This is particularly true when it comes to better leveraging its various expense items.
Looking ahead, management sees huge growth potential. The leadership team believes that Chipotle can have 7,000 stores one day in North America, roughly doubling its existing footprint. After opening about 300 net new stores this year, they plan to open 330 (at the midpoint) in 2025.
So, the pace of openings appears to be accelerating. If the ultimate growth target becomes a reality, Chipotle's revenue and earnings are set to be markedly higher in the future.
3. The current valuation
Chipotle has worked out to be a fantastic investment, with shares up more than 300% in the past five years. This rise would have turned a $10,000 investment into more than $40,000 today.
Even though the stock trades 12% off its high, it's very expensive right now. Investors can buy shares at the current price-to-earnings ratio of 56.1.
On the one hand, this is a 121% premium to the overall S&P 500(SNPINDEX: ^GSPC). Moreover, it's difficult to pay such a high valuation for any business, as it showcases a ton of optimism about the future being built into the stock price.
On the other hand, Chipotle's monster bottom-line gains are hard to ignore. And for some investors, this performance might justify paying such a steep valuation.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
