Is It Too Late to Buy Chipotle Stock?

Chipotle Mexican Grill (CMG 2.92%) has long been a winning stock for investors, but especially since Brian Niccol took over as CEO in 2018. Over the past six years, Chipotle’s stock has risen more than 450%, easily outpacing the broader S&P 500. But now, Niccol has moved on, and investors in the fast-casual restaurant chain might be wondering if the stock’s stellar performance is coming to an end. Is it too late to buy Chipotle stock?

Chipotle’s growth trajectory

Since Niccol took the top job at Chipotle in 2018, he has positioned the company for the digital age, building drive-through locations and speeding up order fulfillment to add convenience for customers. He prioritized getting customers excited about the brand again, whether through a revamped loyalty program, new menu items, or effective marketing campaigns. It’s easy to see why Starbucks wanted to hire Niccol as its new chief executive.

That has resulted in strong top-line performance over Niccol’s tenure, which is one of the leading reasons to like this business. Between 2018 and 2023, Chipotle reported annualized sales growth of 15%. In fact, there wasn’t a single year where the yearly gain was lower than 7% — and that was 2020, the first year of the COVID-19 pandemic and the tightest restrictions on in-person gatherings.

Chipotle’s revenue growth has been driven by a rapidly expanding store count. After opening 271 new locations in 2023 and 93 through the first six months this year, the business is operating 3,530 restaurants (as of June 30). Robust same-store sales increases, powered by higher traffic and spending trends, also deserve credit.

In April, Chipotle opened its first location in Kuwait, partnering with a local franchise group. The plan is to open three more stores in the Middle East. If the business learns that Tex-Mex food is popular there, it’s anyone’s guess how sizable the growth opportunity is.

But the U.S. remains Chipotle’s most important market. Management has explicitly stated that the ultimate goal is to have 7,000 locations in North America over the long term, which would roughly double the current physical footprint. Given that each restaurant rakes in over $3.1 million in annual sales volume with a superb 28.9% operating margin, it makes sense why the executive team is pushing the gas pedal.

Even though Niccol has stepped down, I don’t think shareholders have much to worry about. His operational improvements have left the business in strong shape for his successor, who won’t have to orchestrate a turnaround like Niccol did.

The price isn’t right

Most investors would agree that from a quality perspective, Chipotle is hard to beat. However, that doesn’t mean the stock is an automatic candidate to be added to the portfolio.

The valuation is one critical factor that simply can’t be ignored. Thanks to a strong performance over the years, Chipotle shares trade at a price-to-earnings (P/E) ratio over 53 at recent prices. That’s a massive 120% premium to the overall S&P 500. In my opinion, this is way too step of a valuation to pay, even for a business whose growth has been as strong as Chipotle’s. I think a P/E multiple in the mid 30s makes more sense.

According to Wall Street consensus analyst estimates, Chipotle is projected to increase its earnings per share at a compound annual rate of 19.6% between 2023 and 2026. Of course, it’s usually a good idea to take these forecasts with a grain of salt. But that outlook, while certainly impressive, doesn’t justify paying a P/E multiple as high as Chipotle’s currently is, especially if you believe, as I do, that the valuation will come down meaningfully in the years ahead.

The current setup for prospective investors isn’t favorable, as it prices in a ton of optimism about the company’s future. If Chipotle were to report same-store sales or margin data that missed analyst estimates, for example, I can easily see the stock tanking.

I don’t necessarily believe that it’s too late to buy the stock. If the valuation were to come down substantially, then it’s a different story. So, the best thing to do now is wait and practice patience.