Chipotle Mexican Grill (CMG -0.71%) has satisfied investors, who have been hungry for massive portions of strong returns. Shares of the fast-casual restaurant concept are up a jaw-dropping 366% in just the past five years, easily outpacing the broader S&P 500. This business now carries an impressive $86 billion market cap.
The restaurant stock has soared 40% just this year as of Apr. 26, most recently boosted by better-than-expected first-quarter financials. You might be asking yourself, "Is it too late to buy Chipotle?"
No signs of slowing down
The past four years have been some of the most turbulent times for corporate executives. The pandemic was followed by supply chain issues, inflationary pressures, and rapidly rising interest rates. Even today, there are still fears about an upcoming recession.
Despite these factors that are perceived as major headwinds and could derail any business, Chipotle has continued humming along as if everything was normal. Last quarter proved that.
During the three-month period ended March 31, the company reported revenue and diluted earnings-per-share (EPS) growth of 14.1% and 23.9%, respectively. The top line was bolstered by a same-store sales gain of 7% due to higher transaction counts and average check sizes. The bottom line improved significantly on the back of a year-over-year drop in operating expenses (as a percentage of revenue).
A key part of management's strategy is to open new stores aggressively, and there's no reason they shouldn't follow this plan. The typical Chipotle location rakes in $3.1 million of annual sales, a figure that has trended higher over time.
Stores continue to focus on improving throughput and driving efficiencies to better serve customers. The restaurant-level operating margin of 27.5% speaks volumes about how profitable these stores are. Opening more drive-through locations helps, too.
The ultimate goal is to get the North American store count to 7,000, which would translate to doubling the current footprint. And the figure doesn't include possible expansion in other markets. Chipotle just opened its first restaurant in Kuwait. If it's successful in the Middle Eastern nation, the global market opportunity could be very large.
Wall Street remains optimistic about this industry-leading enterprise. Between 2023 and 2026, consensus analyst estimates call for revenue and diluted EPS to rise at compound annual rates of 14% and 21.2%, respectively. These would be phenomenal gains.
Where's the opportunity?
There's no debate about it: Chipotle's track record of incredible financial performance, as characterized by strong revenue and earnings growth, makes this an outstanding business. I doubt anyone would argue with that. But is it a smart buying opportunity right now? I honestly don't think it is.
Because the shares have soared so much in recent years, it trades at a very steep valuation. The current price-to-earnings ratio of 71 showcases the heightened optimism and enthusiasm the market has toward Chipotle. In my opinion, the downside risk is elevated because of the valuation.
While I believe it's too late to buy the stock, I can understand why some bold investors would still want to add Chipotle to their portfolios. If you think the company can continue beating analyst estimates, it makes sense to buy shares. If the company can consistently beat expectations, it can lift the stock higher.
However, expectations are already sky-high, which leaves virtually no room for Chipotle to make any mistakes. Even a tiny revenue or earnings miss will likely cause the stock to tank.
Being more bullish and optimistic than an already overly bullish and optimistic market isn't the game I want to play. I'll pass on the stock right now without hesitation and wait for a substantial pullback before taking a bite of Chipotle.
