As I noted in a previous column, many Americans reported in a recent survey that they intend to spend more money on food going forward. That bodes well for Chipotle Mexican Grill (NYSE:CMG), which has become one of America’s most popular restaurant chains. What’s more, in the first quarter of the year, Chipotle’s comparable restaurant sales, profits and profit margins all increased by impressive amounts and the company is continuing to innovate effectively and open significant amounts of new restaurants.
In light of all of these points, I view Chipotle stock as a buy at this point for investors looking for increased exposure to restaurants stocks.
Macro Trends Are Favorable
In a recent survey undertaken by the well-respected consulting firm, McKinsey, Americans’ confidence in the economy dropped and reached its lowest level since the end of last year. However, the firm reported that “Millennials and Gen X individuals said they intend to splurge more on food, including both dining out and purchasing food for home consumption.”
Millennials’ desire to spend more on restaurants portends very well for Chipotle. That’s because the company reported that over 50% of its customers are in either the millennial or Gen Z generation. Moreover, Chipotle reports that its customers tend to be wealthier than average. Indeed, a recent study found that the company’s patrons were 20% more likely than average to earn over $125,000 annually. At a time when less well-to-do Americans are feeling squeezed by the high inflation of recent years, Chipotle should benefit from the relative affluence of its customer base.
Chipotle’s Strong Q1 Results Should Keep It Shining
In Q1, the restaurant chain’s top line jumped 14% versus the same period a year earlier to $14 billion, while its comparable restaurant sales advanced 7% year-over-year. Additionally, its restaurant-level operating margin improved by 1.9 percentage points versus Q1 of 2023 to 27.5%.
For all of 2024, the company expects its comparable restaurant sales to climb between 5% to 9%. Also analysts, on average, predict that its earnings per share will rise to $55.73 this year from $44.86 in 2023. Finally, the mean estimate calls for earnings per share to advance to $67.07 in 2025.
Innovating Effectively and Opening Many New Restaurants
Chipotle has introduced a braised beef offering, called Braised Beef barbacoa. Featuring garlic and cumin, this hand-shredded offering strikes me as being rather original in the American fast-food sector. According to CEO Brian Niccol, the entree is becoming more popular while the ad campaign promoting it has been successful.
Indeed, the company believes the new offering has raised its revenue. The success of this new product shows that Chipotle is still able to introduce appealing new food items and market them effectively.
Meanwhile, the company plans to open about 300 new restaurants in 2024. This suggests that it can keep profitably growing its footprint in the U.S. The continued increase in its restaurant count should meaningfully boost its top and bottom lines going forward.
The Street Remains Upbeat on Chipotle
There are multiple signs that Wall Street remains enthralled with the company. For example, Goldman Sachs recently named Chipotle as one of its six top picks in the restaurant sector and started coverage of the name with a “buy” rating. The bank noted that although it thinks that some consumers are becoming more price-conscious, they “are still willing to pay for differentiated value.” As a result, the better-respected brands can gain market share going forward.
Investor’s Business Daily gives Chipotle stock an Accumulation/Distribution rating of B+ , indicating large investors have been buying significant amounts of the shares over the past 13 weeks.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
