Investors crave companies with exceptional long-term capital growth, and Chipotle Mexican Grill has emerged as a rare gem. Over the past five years, its share price skyrocketed by almost 5x, easily outperforming the S&P 500’s 63%+ return since 2018.
But what sets this humble burrito outlet apart from the rest, and is its stock overvalued? In short, is it time to toss this burrito stock to the trash?
A Strategic Pivot: CMG Ventures into Franchising
While all of its existing locations were company-owned, the company’s foray into the Middle East represents its maiden voyage into franchising, partnering with the Kuwaiti company Alshaya Group.
Franchising presents both opportunities and challenges, enabling rapid expansion with lower capital expenditure, but deriving revenue from franchise fees rather than direct sales.
This move allows Chipotle to explore new geographic horizons and experiment with a novel business model.
The Taste of Success: Recent Earnings Results
During the initial quarter of 2023, Chipotle Mexican Grill announced an astonishing 17 percent growth in revenue compared to the previous year. Online sales accounted for a remarkable 39% of the top line.
The company’s EPS also soared by 84% year-on-year, driven in part by lower avocado prices and tight cost measures. These impressive earnings figures continue the company’s trend of robust growth in recent years.
Valuation and Growth Potential: Balancing the Spices
Despite its impressive performance, Chipotle’s TTM non-GAAP forward PE ratio currently stands at an eye-opening 55x, well above peers whose median PE sits closer to the low-teens.
However, the corporation’s exemplary return on total capital, which spiked to 14% on a TTM basis, demonstrates its uncanny ability to use cash resources profitably.
Sizzling Expansion: Looking Ahead
In the prior quarter, the company successfully added over 40 new locations to its culinary universe, elevating its overall presence to encompass more than 3,000 outlets.
Management remains optimistic in its expansion prospects, envisioning the potential to widen its North American footprint alone to an astonishing 7k establishments.
Chipotle’s Recipe for Success
While Chipotle’s valuation appears elevated, its determined expansion aspirations and venture into franchising indicate a strategic shift that could drive further stock value advancements.
With strategic initiatives, operational excellence, and digital innovation, Chipotle has proven its ability to navigate the dynamic restaurant industry successfully.
As it continues to spice up its growth recipe with new locations and innovative strategies, investors can anticipate a mix of growth and profitability in the years to come. CMG remains a spicy recipe for success in the market.