Chipotle Mexican Grill, a beloved restaurant chain, has a reputation for delivering both delicious flavors and impressive investment returns. Over its lifetime, the stock has returned nearly 6,000%, significantly outperforming the S&P 500. However, recent shifts have seen Chipotle's shares cool off after Starbucks lured away its popular CEO. Strong leadership is crucial for companies to realize their full potential, so this is a challenge Chipotle must navigate. Despite the stock's recent decline, many see this as a buying opportunity rather than a sell signal.
Chipotle has a proven growth recipe that could lead to substantial investment returns if the new CEO can maintain the trajectory set by Brian Niccol. Niccol, who joined as CEO in early 2018, had a significant impact; under his leadership, sales more than doubled and earnings skyrocketed. Coming from Yum! Brands' Taco Bell, Niccol led Chipotle from 2,400 to approximately 3,530 stores, emphasizing the supply chain and maintaining consumer trust. Even though his departure is noteworthy, Chipotle has weathered similar transitions, such as the resignation of its founder Steve Ellis in 2017. The established brand and successful business model provide confidence for investors.
Chipotle’s growth strategy is straightforward: it offers fresh, made-to-order meals at attractive prices. This simplicity in business has not only sustained but fueled its growth, as evident from continuous revenue increases year over year. Despite the competitive restaurant market, the U.S. remains Chipotle’s primary growth engine, although international expansion holds promise. With 3,530 stores currently, Chipotle trails competitors like Taco Bell, which has almost 8,000 U.S. locations. The company’s strategy of repurchasing shares augments earnings per share, contributing to a higher share price and returns for investors.
The question now is whether Chipotle stock is a buy, sell, or hold. Given its straightforward but profitable business model and growth potential, the company commands a high valuation. Trading at a forward price-to-earnings ratio (P/E) of 49, which is lofty compared to the market, analysts still expect the company to grow earnings per share by an average of 22% annually over the next three to five years. Compared to Coca-Cola, which trades at a forward P/E of 25 with an expected 6% annual earnings growth, Chipotle appears more expensive but promises significantly higher earnings growth.
For long-term investors, Chipotle’s current dip presents a reasonable entry point, especially given the potential for future earnings growth to catch up to the share price. Although not a bargain, the stock’s price is sensible enough for investors to buy now and continue averaging down if prices fall further. The recent CEO shake-up has presented a buying opportunity worth considering for those looking to capitalize on Chipotle’s ongoing success.
