Shares of Mexican quick-service restaurant (QSR) chain Chipotle (NYSE:CMG) have been going parabolic over the past year at a time when the industry has been in a challenging spot. Undoubtedly, many frequent QSR goers are pulling back, primarily due to recent price increases. As a high-growth industry winner with the ability to take more market share, investors should be taking notice. All things considered, I’m staying bullish on CMG stock going into the second half of the year.
There’s no question that almost everything, including fast food, has become super expensive recently. And if the value isn’t there, consumers are more than fine making their own meals or taking their business to a competitor. Undoubtedly, Chipotle has thrived in this inflationary environment, not because it hasn’t raised prices but because it never was a place to go for cheap eats to begin with.
As the firm doubles down on its expansion while continuing to hit the spot with customers, those looking for reasons to trim the stock after a scorching run may have to look farther.
Chipotle Powers Through Industry Headwinds, Could Continue to Gain Share Over Ailing Rivals
The main draw to Chipotle Mexican Grill was the “health factor,” with its fresh-prepared ingredients assembled just the way customers want. As the company continues drawing in crowds through menu innovation (customers have been loving the Chicken Al Pastor) while seeking to unlock efficiencies in the backroom through various automation initiatives (not quite AI, but still remarkable), I wouldn’t dare bet against CMG stock. This is despite the stock trading near all-time highs.
Further, the company seems poised to continue growing annual units with its expansion plan. With as many as 285-315 new locations to open this year (slightly up from the 271 opened last year), Chipotle could be a freight train that’ll be tough to stop as it continues flexing its remarkable pricing power. It’s hard to avoid lengthy lines at the local Chipotle these days, likely because the chain’s less-healthy fast-food rivals have overextended themselves on pricing.
At 67.1 times trailing price-to-earnings (P/E), Chipotle stock does not come cheap right here. But then again, shares don’t deserve to be cheap, not while it’s the QSR growth company that many rivals aspire to become more like. With a solid growth narrative intact and significant momentum behind shares, some may view CMG stock as worth paying an even higher multiple.
Chipotle Stock: Bill Ackman Takes a Few Chips Off the Table in the First Quarter
Activist investor and billionaire Bill Ackman seems content with taking a bit of profit off the table after the latest melt-up in shares. Recently, Ackman-run Pershing Square Capital Management announced that it had reduced its holdings in Chipotle by close to 744,000 shares in Q1—that’s close to 10% taken right off the holding compared to the end of last year.
Indeed, CMG stock has been a huge winner for Ackman and Pershing Square, who bought up shares during the E. Coli outbreak at certain Chipotle locations many years ago. Personally, I think Ackman is only smart to trim here, with the P/E multiple now slightly on the high end of the past-year range.
Apart from the lofty price of admission, CMG stock was also named as one of the most crowded longs in the entire U.S. restaurant industry, at least according to UBS (NYSE:UBS). Whenever the valuation is on the swollen side, with many traders “crowding” into a name, it’s only disciplined to take a small step back, as Ackman appears to have done.
Only time will tell if Ackman’s trim proves timely. Regardless, management is shooting for 7,000 restaurants over the long term, more than double 2023’s year-end store count. That’s an incredibly ambitious goal, but if most locations can continue drawing in the lunchtime crowds, perhaps the magnitude of earnings growth could justify the recent wave of valuation multiple expansion. Nonetheless, investors seem impressed by the resilient growth profile that’s starting to look unmatched.
I’m sure many companies, such as CAVA Group (NYSE:CAVA), are hungry to grab a slice of that Chipotle lunch crowd. Whether they’ll have any success moving forward, though, remains the big question. With such an aggressive expansion plan, Chipotle may not give its smaller rivals much ground to catch up.
Is CMG Stock a Buy, According to Analysts?
On TipRanks, CMG stock comes in as a Moderate Buy. Out of 26 analyst ratings, there are 18 Buys and eight Hold recommendations. The average CMG stock price target is $3,243.46, implying upside potential of 2.3%. Analyst price targets range from a low of $2,700.00 per share to a high of $3,600.00 per share.
The Bottom Line on CMG Stock
Chipotle stock has seemingly defied the odds in a rough industry environment. Moving ahead, I’d look for the company to put its foot a bit harder on the expansion pedal while seeking to keep customers coming back via intriguing, limited (as well as permanent) new menu items and continued quality.
As sales look to surge, I’d also expect margins to nudge incrementally higher. This can happen as the firm stays disciplined in cost controls while incorporating cutting-edge new prep tech in the backroom. I’m inclined to argue that CMG stock’s rich multiple is worth paying for, even as big names like Ackman trim.
