While restaurant chain Chipotle Mexican Grill (CMG) stock is up 35% over the past year, it is still hovering 15% below its 52-week high. Despite this setback, the company’s growth strategy remains highly effective, and its most recent results suggest the stock is well positioned for a rebound. With revenue growth accelerating and continued margin expansion driving earnings, I believe CMG stock has strong potential to not only reclaim its previous highs but also surpass them in the near future, despite its seemingly rich valuation. Consequently, I am bullish on CMG stock.
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Chipotle’s Growth Strategy Remains Effective
At first glance, something might seem wrong with Chipotle’s growth trajectory, considering the stock’s inability to recover from July’s steep losses during a rather bullish equities market. And yet, if you take a closer look, Chipotle’s growth strategy remains as robust as ever. The company continues to execute on its tried-and-tested playbook of opening new stores in high-traffic areas while also focusing on boosting same-store sales, which has historically paid off in driving excellent top-line growth.
The success of this strategy was once again evident in Chipotle’s latest Q3 earnings results. Total revenue grew by 13.0% year-over-year, which, interestingly enough, even implies an acceleration compared to last year’s 11.3% growth. I find this achievement quite impressive, given the headwinds plaguing the quick-service restaurant (QSR) sector lately. Also, as I just hinted, Chipotle’s revenue growth came from two key sources: new restaurant openings and same-store sales increases.
Specifically, the company opened 86 new locations in Q3, with 73 of these including a Chipotlane. In the meantime, comparable restaurant sales grew by 6%, supported by a 3.3% increase in transactions and a 2.7% boost in average check size. If you listen to the post-earnings call, you will find that management attributed this growth to higher transactions due to the return of the much-anticipated Smoked Brisket offering and improved operational throughput, demonstrating the enduring strength of Chipotle’s value proposition. I find this to be quite insightful, especially considering the rumors of customer complaints about Chipotle’s high pricing. Clearly, the company’s results tell a different story.
Has The Market Forgotten Chipotle’s Earnings Growth Story?
The rather lackluster performance of CMG stock in recent months also suggests that the market may have lost sight of Chipotle’s impressive earnings growth story. Investors seem to overlook its outstanding pace of earnings growth, which has been the main driver behind its remarkable share price appreciation over the years.
In simple terms, rising same-store sales inherently allow for better fixed-cost absorption per restaurant that eventually translates to margin expansion. This trend was evident again in Q3, with the company’s operating margin expanding from 16.0% to 16.9%. The expansion came despite cost inflation in critical inputs such as avocados and dairy, which suggests impressive operating leverage in action. In addition, labor costs as a percentage of sales were flat at 24.9%, benefiting from increased operational efficiency despite higher wages in states like California.
Last but not least, it’s essential to remind you that Chipotle has no long-term debt on its balance sheet, further improving its profitability prospects. Without interest costs weighing down Chipotle’s bottom line, its net income margin jumped to 13.9%, up from 12.7% last year. The continued expansion in margins and robust revenue growth propelled adjusted EPS to $0.27 per share, marking an impressive 17.4% increase and significantly outpacing revenue growth.
Valuation Remains Justifiable Despite Market Skepticism
At this point, one could argue Chipotle’s seemingly rich valuation justifies the market’s skepticism toward the stock lately. At around 53.6 times this year’s projected earnings, CMG stock certainly looks expensive at first glance. However, given the company’s ongoing pace of EPS growth, this multiple appears far more reasonable. Consensus estimates forecast EPS of $1.12 for Fiscal 2024, implying a year-over-year increase of 24.5% compared to last year.
In the meantime, Chipotle’s unique model—owning and operating all its restaurants and scaling margins through superior efficiency—positions it well for sustained earnings growth over the medium term. Thus, I wouldn’t be surprised if EPS growth is sustained in the low 20s% in the coming years. For this reason, I believe that Chipotle should be able to grow into today’s valuation comfortably, which, in turn, suggests continued upside potential despite what otherwise seems a lofty valuation industry standards-wise.
Is CMG Stock a Buy?
Wall Street analysts seem relatively optimistic regarding Chipotle’s prospects moving forward. Specifically, CMG stock features a “Moderate Buy,” with recent analyst ratings consisting of 13 Buys and seven Hold ratings over the past three months. At $65.37, the average CMG stock forecast implies 11.02% upside potential.
For the best guidance on buying and selling CMG stock, look to Eric Gonzalez. He is both the most accurate and most profitable analyst covering the stock (on a one-year timeframe), boasting an average return of 34.74% per rating and an impressive 88% success rate.
Conclusion
Summing up, Chipotle’s growth strategy was once again validated in its latest results through accelerating sales, margin expansion, and even more substantial earnings growth. In my view, this mix positions the stock for a strong rebound.
Despite Chipotle’s valuation remaining at premium levels and recent market skepticism, its tried-and-true growth strategy, impressive operational efficiency, debt-free balance sheet, and continued potential for outsized EPS growth form a compelling investment case.
