Chipotle Mexican Grill’s (NYSE:CMG) second-quarter financial results proved, yet again, that Chipotle stock is a best-in-class restaurant play. Chipotle stock entered rough waters after the company executed a massive 50-for-1 stock split in June of this year.
Following the split, Chipotle stock declined sharply, dropping nearly 30% from a 52-week high of $69.26 a share on June 18 to a trough of $49.83 on July 26. However, following a strong Q2 print and improved investor sentiment, Chipotle stock is once again on an upswing, having gained 10% since bottoming.
This short-term volatility doesn’t take away from the fact that CMG stock has been a long-term winner for investors, gaining more than 6,300% since its 2006 initial public offering.
Strong Q2 Results
The hand-wringing over Chipotle stock came to an end after the restaurant chain that specializes in Mexican cuisine posted better-than-expected Q2 financial results. The company reported EPS of 34 cents compared to 32 cents that had been the consensus forecast of analysts. Revenue amounted to $2.97 billion versus $2.94 billion that had been expected on Wall Street. Sales were up 18% from a year earlier.
Chipotle also announced that its same-store sales rose 11% in Q2, beating estimates of 9.2% growth. Foot traffic at its restaurants increased 8.7% during the quarter, and the company continues to gain market share across every consumer category – affluent to low-income customers. Management attributed the earnings beat to higher prices that it has used to offset ingredient costs for items such as avocados and oil.
Chipotle opened 52 new domestic restaurant locations and one new international outlet during the quarter. The company reiterated its full-year outlook that same-store sales will grow by a mid- to high-single-digit percentage and that it plans to open 285 to 315 new restaurants in 2024. There were no signs of weakness or a slowdown at the restaurant chain during the quarter.
Controversy and Valuation
Weighing on Chipotle stock over the past month and leading into the company’s Q2 print were issues that included both the overall health of the restaurant industry and a social media backlash over perceptions that Chipotle has reduced its portion sizes. Known as the “Burrito Bowl Backlash” online, management has vehemently denied that portions have been cut and has vowed to ensure customers get generous helpings at all restaurants.
While most analysts have dismissed the portion size controversy as a passing social media event, some have raised concerns about the valuation of Chipotle stock. The company’s shares currently trade at a lofty multiple of 53 times future earnings estimates. While steep, analysts seem divided over the valuation, with some saying the stock is too expensive and others claiming the premium price is justified by the company’s growth.
The current consensus among 26 professional analysts who cover Chipotle is that the stock is a “moderate buy.” There are currently 16 “buy” and 10 “hold” ratings on the stock. There are no “sell” ratings. The median price target on the shares is 18% higher than where they trade presently.
Buy Chipotle Stock
Despite some recent headwinds, Chipotle Mexican Grill remains one of the best restaurant stocks that investors can own. It’s a testament to the company and its management team that it was able to post such a strong Q2 print amid controversy and volatility, not to mention one of the biggest stock splits in the history of the New York Stock Exchange. Looking ahead, there’s every reason to believe that Chipotle’s growth trajectory will continue, especially with inflation coming down and interest rates expected to follow this autumn. For all of these reasons, Chipotle stock is a buy.
On the date of publication, Joel Baglole did not have (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.
