Chipotle(NYSE: CMG) has been one of my favorite fast-casual restaurants for quite some time now. It's also been an investor favorite during the past half-decade or so. It has far outperformed all three major indexes (S&P 500, Nasdaq Composite, and Dow Jones) and many top-class growth stocks during that span.
Unfortunately for Chipotle investors, it's been a shaky ride since its 50-for-1 stock split in mid-June. The stock was down more than 18% since the stock split. It plunged even further when it said that Chief Executive Officer Brian Niccol would be leaving to take over at Starbucks.
The news caused Chipotle's stock to drop by as much as 12% on the day of the announcement before rebounding a little bit to finish the day. Regardless, the dip leaves the stock well below its peak and gives investors a great chance to begin buying shares. If you don't take advantage of this time, there's a good chance you'll regret it in the future.
Niccol leaves Chipotle in great financial shape
Niccol led Chipotle through some of the most trying times in its history, including the aftermath of an E. coli outbreak that had the potential to cause major reputational damage. That seems like an afterthought nowadays, as Chipotle has had great financial success since that 2015 crisis.
In the second quarter, Chipotle generated $3 billion in revenue, up 18% year over year and more than double the revenue of five years ago. Its operating income (profit from core operations) has been even more impressive during that span.
CMG Revenue (Quarterly) data by YCharts.
It's one thing to generate more revenue and profit; it's another thing to do so while operating more efficiently, and Chipotle is doing just that. In this past quarter, its operating margin widened to 19.7% from 17.2% just a year ago.
It's also encouraging that Chipotle is entering this new chapter with a nice cash stash to rely on. It has more than $806 million in cash and cash equivalents, $240 million more than last year. This is a nice cushion for the company during this transitional period, though it shouldn't have to rely on it.
Chipotle continues to embrace customer convenience with new restaurants
Chipotle continues to add restaurants at an impressive pace. It opened 52 new restaurants in the second quarter, 46 of which had a Chipotlane, the company's drive-thru lane for digital orders.
The increase in Chipotlanes shows Chipotle is focusing on increasing digital sales and becoming more convenient for customers. That will be key in the coming years as convenience becomes a major selling point for restaurants of all types.
Fast-food restaurants have been using the drive-thru lane for decades, but now they're also using apps and mobile sales. Fast-casual restaurants have seemingly been hesitant to adopt drive-thrus, but now they're embracing the convenience. It's a shift in the industry that Chipotle is trying to stay ahead of by combining the two. Doing so efficiently can be the key to its continuing high growth.
Now can be a good time to begin a stake in Chipotle
Chipotle's stock has long been, and continues to be, priced at a premium. Its price-to-earnings (P/E) ratio far exceeds that of restaurant giants like McDonald's,Yum! Brands (owner of Taco Bell, Pizza Hut, and KFC), and Domino's Pizza.
CMG PE Ratio data by YCharts
Even with a P/E ratio of almost 51, Chipotle is well below its average for the past five years (although it's slightly skewed because of the 2020 COVID-19-fueled run). This doesn't mean investors should go all in, but if you've been interested in the stock, now could be a good time to begin your stake.
Chipotle's long-term prospects remain strong, but it could be a good strategy to dollar-cost average your way into a stake during this transitional period. Decide how much you want to invest in the stock, set a schedule, and stick to it regardless of its price movements.
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Stefon Walters has positions in McDonald's. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Domino's Pizza, and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
