Buying companies behind well-recognized brands is often a recipe for investing success, as they usually benefit from repeat business. This helps in yielding consistent earnings growth that translates into magnificent capital appreciation over the long haul. In the fast-casual restaurant chain space, Chipotle Mexican Grill (CMG) is a stand-out and has a lengthy growth runway ahead. Year-to-date, shares have rallied more than 34%, topping the 23% gains of the S&P 500 Index (SPX). However, the valuation looks concerning. As a result, I’m starting my coverage with a Hold rating.
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Chipotle Posted Respectable Q3 Results
On October 29, Chipotle released third-quarter results that bolstered my Hold rating. The company’s total revenue climbed 13% higher over the year-ago period to $2.79 billion. For more color, this was $30 million short of the analyst consensus. New restaurant openings contributed to the majority of this topline growth. The remaining revenue growth was driven by a 6% increase in comparable restaurant sales.
This growth was made possible by a mix of a 3.3% uptick in transactions from more traffic and a 2.7% increase in average check via higher prices. Chipotle’s adjusted diluted EPS jumped 17.4% year-over-year to $0.27, which topped the analyst consensus by $0.02. Savvy cost management helped the company’s net profit margin expand by 40 basis points to 13.1%. Along with a marginal decrease in the share count from share buybacks, this helped adjusted diluted EPS growth outpace total revenue growth.
Robust Growth Still Lies Ahead for Chipotle
Chipotle looks to be in a position to sustain its operating results for the foreseeable future, which is another reason for my Hold rating. In October, the company opened its first restaurant in Dubai in partnership with international franchise retail operator Alshaya Group. That was after the company also opened its first two restaurants in Kuwait in April and September.
This could be the beginning of hundreds more locations opening in the region over time. That comes on top of the company’s long-term target of 7,000 locations in North America. For perspective, this would represent a doubling from the roughly 3,600 company-owned locations as of September 30, 2024. Chipotle isn’t opening locations for the sake of opening them, either. In the last four quarters, the company has closed just seven locations versus more than 300 openings. This shows that Chipotle’s restaurants continue to be warmly received in most markets.
Chipotle is also laser-focused on improving the experience for customers. That was further evidenced by its recent milestone of the 1,000th Chipotlane opening in the Kansas City metro area on November 21st. In the accompanying company press release, Chief Brand Officer Chris Brandt noted this restaurant format is the fastest way to get Chipotle to fans. Thus, a continued emphasis on these locations should help to buoy comparable restaurant sales. Finally, Chipotle recently announced menu price hikes. Since Chipotle remains the best value in its space, CFO Adam Rymer argues that most price rises won’t matter to most customers.
For these reasons, the analyst consensus is that adjusted diluted EPS will surge 19.2% to $1.32 in 2025. Analysts expect another 18.7% rise in adjusted diluted EPS to $1.57 in 2026. These growth rates come on top of a consensus of a 23.7% jump in adjusted diluted EPS to $1.11 in 2024.
Chipotle Is a Financial Fortress
Chipotle also remains in an enviable position to execute its long-term growth plans of opening a few hundred restaurants a year, which boosts the rationale for my Hold rating. Why do I believe the company is set up well for future restaurant openings? Well, Chipotle had $698.5 million in cash and cash equivalents on its balance sheet as of September 30, 2024. Against no long-term debt, I believe this is an especially impressive financial condition. That and $668.7 million in investments on the balance sheet led the company to generate $70.5 million in interest and other income through the first nine months of 2024.
The Stock Appears to be Fully Valued
Chipotle is set up for sizable bottom-line growth in the years ahead, but this already looks to be fully recognized by the market. Shares are trading at a forward P/E ratio of 49x. That’s less than the 10-year average P/E ratio of 60.2x, but a valuation multiple this high can’t be sustained forever. Even with its respectable growth runway, Chipotle will still have a hard time replicating the growth that it has generated in recent years. This is because of the law of large numbers, which requires larger and larger absolute growth to maintain the same relative percentage growth rate. That’s why I would like to see a correction before I issue a potential rating upgrade.
Is Chipotle a Buy, According to Analysts?
Turning to Wall Street, analysts have a Moderate Buy rating consensus on Chipotle. Out of 22 analysts, 14 have issued Buy ratings, while eight have Hold recommendations in the last three months. The average 12-month CMG stock price target of $67.25 implies a 9.63% upside potential from the current share price.
Investment Takeaway
From a fundamentals standpoint, Chipotle is in great shape. The business has leeway to open hundreds of restaurants each year into the next decade. The company also has the financial means to do so. That said, the valuation leaves little room for near-term upside, though. That’s why I’m initiating coverage with a Hold rating.
