Investors have had plenty of time to absorb Chipotle Mexican Grill’s (NYSE:CMG) historic 50-for-1 stock split. Completed on June 26, The fast-casual restaurant chain’s stock went from almost $3,300 a share to $65 a share. Having said that, is CMG stock a buy?
While nothing about the business changed, it just made its stock more affordable for investors, is the stock a good buy today? Shares have tumbled 20% since the split and that was before yesterday’s market rout. In fact, Chipotle’s stock was barely affected by the turmoil. Shares were down less than 1%.
However, since CMG was falling beforehand, indicating market concern about what has been an amazing growth story, investors need to think about what the future will bring. Let’s take a closer look at whether you should buy, sell, or hold Chipotle stock.
Another Earnings Beat
CMG stock has been a phenomenal investment for the past decade, tripling in value over that time. The combination of good, affordable food conveniently available was a winning combination.
However, the combination of its stock split and second-quarter earnings report conspired to send the Mexican food chain’s stock lower. Not that it was a bad report. Revenue grew 18% year-over-year to $3 billion as comparable restaurant sales rose by double-digits, an 11.1% rise.
Restaurant-level margins also improved to 28.9% leading to a 32% increase in earnings per share to 33 cents.
So why the selloff? In a word, guidance. Management forecasts comps to expand by mid- to high-single-digit rates. Particularly at the lower end, that’s a marked deceleration from the 11% it saw in the second quarter. And with comps growth slowing to 6% in June and July, it could be Chipotle’s growth engine is running out of gas.
A Fixable PR Problem
Chipotle stock is also affected by the drumbeat of poor publicity about portion sizes. Apparently, some restaurants have been skimping on portions, and videos showing it have appeared all over social media.
When consumers are already strapped for cash and their favorite restaurant is chintzy with the servings, it is not a good look. CEO Brian Nichols directly responded to the issue by saying that is not a company directive.
“Generous portion is a core brand equity of Chipotle. It always has been, and it always will be,” he told analysts. The company is reiterating at the store level commitment to generous portions.
Nearly a decade ago Chipotle Mexican Grill suffered a spate of e-coli outbreaks that crushed its stock as well over 100 people were sickened. It took a long time to regain consumer trust but a commitment to food safety finally won them back.
Restaurant managers being cheap with serving sizes isn’t on the same level as a health crisis but it is notable that was the seed from which Chipotle stock began its historic run higher.
Customers Are Still Coming Back
A lot of the softness we’re seeing with Chipotle stock today is due more to concern about the economy and the rest of the restaurant industry than with the Mexican food chain itself. With sales and margins still strong and the company still realizing growth, the business fundamentals remain in place.
Location analytics firm Placer.ai found foot traffic to Chipotle restaurants increased 17% in the second quarter while visits per location were nearly 10% higher. It attributes that to intense customer loyalty that has grown significantly since 2019 to over 40 million members.
It was able to notch its largest one-day sales event ever by gamifying its promotion around National Burrito Day. The convenience of its Chipotlanes drive-thru windows also contributes to the consistent growth Chipotle witnesses.
The Final Verdict
So is Chipotle stock a buy, sell, or hold? While acknowledging the PR problem of skimping on food portions, it is not a death knell to the fast-casual chain. It is a correctible problem and management is moving swiftly to address it.
The overall economic concerns that are weighing on the stock are beyond its control. However, because Chipotle is synonymous with good food at good prices, it will fare better than the fast-casual industry as a whole.
Because Chipotle Mexican Grill’s fundamentals are intact and the market is offering a discount on its shares, that ranks Chipotle stock a “buy” in my book.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
On the date of publication, Rich Duprey 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.
