Chipotle (NYSE:CMG) has outperformed the S&P 500 (SPX) over several years. The stock has gained 80% over the past year and has a five-year gain above 300%. Some investors look for up-and-coming stocks that can generate massive gains, while others want the proven winners. Chipotle has the features of a proven winner and the financials to support further expansion. Thus, I am bullish on Chipotle stock and believe it offers solid diversification.
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Restaurant Growth Is Accelerating
Chipotle has ambitious goals for restaurant growth and has been growing at a steady clip over the past few years. The company has a long-term goal of operating 7,000 restaurants in North America. This vision represents a significant step up from its 3,437 restaurants at the end of 2023.
Chipotle opened 121 restaurants in the fourth quarter of 2023. This strong push brought the company’s total 2023 restaurant openings to 271. Most of these restaurants come with Chipotlanes, which have been solid revenue drivers for the company.
Chipotle’s 2024 guidance indicates that restaurant growth will continue to accelerate. The company anticipates opening 285-315 additional restaurants in 2024. The midpoint of 300 restaurants represents a 10.7% year-over-year increase.
Chipotle is gaining market share without franchising any of its restaurants. Many fast food chains use franchising to grow with less effort and operate as pseudo real estate businesses. Chipotle does not want to give up control over how restaurants are run, which is a key reason the company hasn’t jumped into this industry.
A change of heart several years down the road can expose the company to another growth opportunity that increases the number of restaurants. However, Chipotle has demonstrated that it can grow just fine without any franchises.
The Financials Look Great
Revenue and earnings both came in strong to close out the year. Revenue increased by 15.4% year-over-year, while net income was up by 26.1% year-over-year. Those financials helped the company reach a double-digit net profit margin.
It’s been normal for Chipotle to post double-digit year-over-year growth rates for revenue and net income. The fast-food restaurant chain grew revenue by 14.3% year-over-year in 2023 and increased its diluted earnings per share by 38.4%. Growth should continue in the years ahead.
Chipotle’s profits are rising and can help the company open more restaurants. Those rising profits are one of the catalysts behind Chipotle’s optimistic guidance about restaurant openings. As Chipotle expands its market share, the company will be in a better position to open more than 300 restaurants per year consistently.
Profit Margin Expansion Addresses the Only Weakness
Valuation seems to be the company’s only weakness, as it currently trades at a 49.3x forward P/E ratio. While the valuation may seem excessive for investors with short time horizons, an investor with a five-to-10-year horizon can more easily accumulate shares despite the valuation. Nonetheless, the company’s rising net profit margins can quickly address the valuation and turn it into a point of strength within a few years.
Chipotle had an 11.21% net profit margin in Q4 2023. That’s much lower than McDonald’s (NYSE:MCD) 31.83% net profit margin in the same quarter. Chipotle isn’t going to spring up to net profit margins above 30% this year, but it demonstrates what is possible for the industry. I believe that Chipotle has room to reach 15% and 20% net profit margins within a few years.
Scaling the existing number of restaurants will improve margins, and Chipotle is moving in the right direction in that regard. The company also has strong brand loyalty that gave it the flexibility to raise prices four times over the past two years.
It’s no secret that Chipotle offers food that attracts loyal customers to its restaurants. Many people come back frequently, which creates habits and good experiences. Even if profit margins don’t immediately jump to 15% or 20%, the company’s growing top line gives profits more room to expand.
Is CMG Stock a Buy, According to Analysts?
CMG stock is rated as a Moderate Buy among 28 analysts. The stock has 20 Buy ratings, eight Holds, and zero Sells. The average CMG stock price target of $2,734.63 implies 1.7% upside potential. The highest price target of $3,100 suggests the stock can rally by approximately 15%.
The Bottom Line on Chipotle Stock
Chipotle has catered to Gen Z and others who seek healthier fast food options. The company has gained market share quickly since its founding in 1993 and continues to grow at a fast pace. Chipotle’s rising net profit margins support more restaurant openings, and more restaurants will scale revenue and earnings.
The firm’s only weakness is its valuation, but those metrics will likely work out for investors who hold onto this stock for several years. CMG is appealing to investors who can buy and hold the asset. Plus, it has outperformed many indices and has a good runway for future growth.
