3 Reasons Why Warren Buffett Should Buy Chipotle Stock Hand Over Fist, and 1 Reason Why He Might Regret It

Warren Buffett is certainly familiar with the restaurant industry. Berkshire Hathaway, the conglomerate he has been running for decades, owns Dairy Queen. And it has previously owned Restaurant Brands International.

I think the Oracle of Omaha likes the durability of these businesses. After all, people will always need to eat. What’s more, the favorable locations of restaurants introduce another competitive advantage.

That’s why I believe there are three reasons Chipotle Mexican Grill (CMG -1.08%) is a company Buffett should consider buying. There’s also one important factor that that would probably cause him to regret making that decision right now.

Brand

If you look at Berkshire’s top stock holdings, like Apple, Coca-Cola, and American Express, you’ll notice that Buffett appreciates businesses with strong brand recognition. Chipotle might not be on par with these names, but it has definitely developed a leading brand in the restaurant industry.

According to Piper Sandler‘s Taking Stock With Teens fall 2024 survey, Chipotle is the third-most-popular restaurant chain among nearly 14,000 U.S. teenagers. Working with social media influencers helps drive brand visibility.

Chipotle’s success as a fast-casual pioneer has resulted in other restaurants copying the same model. For example, referencing a chain as the “Chipotle of Mediterranean food” or as the “Chipotle of Asian food” are clear signs of brand power.

Customers

Buffett wants to own companies that prioritize taking care of the needs of their customers. In Chipotle’s case, it’s not only about providing high-quality food at a great value, but also about reducing friction and driving deeper connections.

Here’s where the company’s digital investments come into play. Chipotle launched its rewards program in March 2019, and it has already amassed 40 million accounts (according to data from early last year). This provides a channel to engage with consumers by introducing offers or marketing new menu items. Plus, it gives management valuable data.

Chipotle is also building out drive-thru locations at a rapid clip. Of the roughly 330 stores the company plans to open in 2025, more than 80% will come equipped with so-called Chipotlanes. The business demonstrates a focus on catering to its hungry customers, allowing them to order their favorite menu items in ways that are most convenient for them.

Pricing power

Buffett has previously said that one of the top qualities he looks for is the ability to raise prices. You might not believe a restaurant enterprise falls into this category.

However, Chipotle has exhibited pricing power. Over the past few years, the business has had to deal with higher food and packaging costs due to inflationary pressures. Executives increased menu prices on numerous occasions to offset rising expenses.

Despite asking customers to pay more, Chipotle continues to report impressive financial performance. Average annual sales per store of $3.2 million in Q3 2024 was 48% higher than in the same period five years ago. And the operating margin steadily expands, showcasing the benefit that pricing power can have.

Red flag

It’s not hard to believe that Chipotle would catch Buffett’s eye based on its brand, customer focus, and pricing power. But there’s one major red flag that would likely cause him to hesitate.

Buffett is a value investor, as he always seeks to have a margin of safety before buying a company. As of this writing, Chipotle stock trades at a price-to-earnings ratio of 53.7. Even for a high-quality enterprise that has grown earnings at a strong pace, that’s a steep multiple to pay.

Chipotle is a wonderful business that should be on your radar. Just wait until the valuation drops before you think about buying shares.