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Is Chipotle Stock Too Expensive?

Posted on Monday, September 30th, 2019 by Chris Markoch

Chipotle (NYSE:CMG) stock is expensive. But does that mean it’s time to sell? The company gained a loyal following that saw the stock reach a high of over $700 a share in 2015. Since then, the company has been hit by two setbacks. However, Chipotle stock has rallied and has currently reached a new all-time high at over $800 per share. Some analysts even suggest Chipotle could be a $1,000 per share stock. This would put it in the company of some of the high-flying tech stocks like Alphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN)

What’s fueling the optimism is strong growth numbers. In its most recent earnings report, Chipotle reported a same-store sales increase of 10%. Margins for the restaurant chain also rose from 19.7% in 2018 to 20.9% for the same period this year. The company also beat on both the top line and bottom line. However even as, and maybe because, the stock is up over 75% in 2019, some analysts are saying the rate of growth is not sustainable.

However, Chipotle can be expensive and still be a good buy. The two statements are not mutually exclusive. However, for investors to consider buying Chipotle at this level, they need to believe the stock has room to run. Let’s take a look at the past, present, and potential future for Chipotle stock.

Chipotle has seen its share of negative headlines

In late 2015, Chipotle was part of a food-borne illness scandal. While it’s never good for a restaurant chain to make headlines because customers get sick from eating its food, this scandal was particularly damaging for Chipotle. Since its inception, the company has had a reputation for producing “food with integrity”. The restaurant chain distinguished itself by focusing on issues like sustainability, sound animal husbandry, and responsible sourcing. Not surprisingly, this was a message that resonated well with its target audience of young, upwardly mobile professionals who were looking for an alternative in the casual, fast-food space.

So with the stock over $700 per share and looking like a “cult stock”, investors were rightfully concerned. The stock tumbled nearly 40% but still remained above $400 per share as the company seemed to find its footing.

One reason for their success in getting past the headlines was that Chipotle immediately took ownership of the problem (not that they had much choice). Consumers tend to be skeptical of a company’s public relations efforts in the midst of a crisis. This is particularly true of the Millennials and Generation Z consumers that drive Chipotle’s business. However, Chipotle’s approach was very “on brand” and customers returned.

Then another scandal hit. This one was a data breach in early 2017. Although the breach “only” affected restaurants in five states, the stock took another hit. Analysts downgraded the stock and openly questioned whether the chain could win back the trust of their customers.

Chipotle has successfully changed the headlines

In January of 2018, a new CEO took the helm at Chipotle. And since then, the company has taken on a number of initiatives that have helped increase sales. The setbacks for Chipotle crystallized a common problem for restaurants. Never give customers a reason to visit your competition. When customers took a pause from Chipotle, they discovered that there were several other alternatives.

Chipotle realized their problem was not just convincing customers it was safe to eat at their restaurants, but that it was convenient to do so. To that end, Chipotle has done extensive work on its digital presence. The company has made it easy for customers to place orders on their mobile device and pick it up at the restaurant or have the food delivered. An interesting discovery for the company is that this digital push has not just driven sales among frequent users. The ability to order via an app has helped attract first-time customers who may find it intimidating to go through all the various menu options with a line of customers waiting behind them.

And the company has also continued to expand its menu options to keep up with customer preferences. In the past year, Chipotle’s menu has expanded to include bacon, tacos, and nachos.

What’s next for Chipotle stock?

So is Chipotle destined for a $1,000 per share price (that would still be over 20% higher than its current price)? Or is it primed for a large correction back to 2016 and 2017 levels? I think the answer maybe somewhere in between. Investors have a way of overcorrecting. Just as investors may have punished the stock too much after the two scandals, they may be rewarding the stock too much today.

Chipotle is a great brand. However, customers have more options today than ever before. And the target audience for Chipotle is always looking for the next new thing. I’m also a little bit concerned that the stock is not yet pricing in a possible economic downturn. If a recession comes, and most analysts are saying it’s a question of when not if, spending on restaurants is one of the first line items to get struck from a budget. In the short term, Chipotle looks like it still has room to run, but as a long-term play, I would think there are less expensive options.

 

Companies Mentioned in This Article

CompanyCurrent
Price
Price
Change
Dividend
Yield
P/E
Ratio
Consensus
Rating
Consensus
Price Target
Chipotle Mexican Grill (CMG)$822.48+0.3%N/A90.78Hold$795.70
Alphabet (GOOGL)$1,339.39+0.9%N/A28.19Buy$1,418.00
Amazon.com (AMZN)$1,751.60+0.6%N/A86.97Buy$2,194.71

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