Chipotle Mexican Grill (CMG -5.24%) is doing something it's never done before in its 30-year history. The company is splitting its stock, with the operation scheduled for this week. The decision came after the shares soared in the triple digits over the past few years, reaching beyond $2,000 last year and past $3,000 this year.
The reason for such enormous gains? This fast-casual restaurant has reported quarter after quarter of growth -- even excelling during early pandemic days thanks to its digital ordering system -- and has built a brand that keeps customers coming back. Now, the stock split will bring the per-share price of this high-flying stock down, making it more accessible for a broad range of investors.
Let's take a look at what to expect -- and consider whether this restaurant giant is a buy.
Image source: Getty Images.
Why launch a stock split?
First, a few points about stock splits in general. These operations involve issuing more shares to existing shareholders to lower the price of each individual share. They are purely mechanical and don't change a company's market value, the value of your holding, or the valuation of the stock. This means they don't serve as a catalyst for stock performance -- investors won't rush out to buy a stock just because it's announced a stock split.
That said, a stock split is generally positive for a company over time because it makes it possible for investors who want to make a small purchase to do so without relying on fractional shares. And these operations also suggest a company is optimistic about its future, with the idea that the stock, from its new level, can once again take off.
The new share price is determined by the ratio of the split, and this brings me to the subject of the Chipotle operation. In one of the biggest stock splits in New York Stock Exchange history, Chipotle will offer current holders 49 shares for every one share they own. Shareholders will receive the shares after the June 25 market close, and the stock will begin trading on a split-adjusted basis as of the market open on June 26.
Considering Chipotle's price today -- about $3,214 -- the price following this 50-for-1 stock split will be about $64.
Though the record day to benefit from the split was on June 18, if you buy the stock prior to the split's completion, don't worry -- the right to the extra shares transfers from the seller to you when you make the purchase.
Chipotle's earnings growth
So, by midweek, Chipotle's per-share price will make the stock an easier buy, but otherwise, the investment opportunity will remain the same as it was prior to the stock split. Now let's consider if this top restaurant stock is a buy. No one can say Chipotle hasn't been successful when it comes to growing earnings and widening margins -- over time, the company has done this well.
CMG Operating Margin (Annual) data by YCharts
And it's done all of this while expanding. Last year, Chipotle opened 271 new restaurants, and more than 85% of them are equipped with a digital order pickup window called a Chipotlane. This keeps the company on track to reach its long-term goal of 7,000 restaurants in North America, more than double today's number. Chipotle also aims to reach $4 million in average unit volumes (AUV), or the average sales each location generates, up from about $3 million currently.
Meanwhile, Chipotle customers keep returning thanks to the restaurant's promise of fresh and healthy products and its focused menu. This helped the company report double-digit revenue growth to $2.7 billion in the most recent quarter, and gains in earnings per share and operating margin.
The valuation problem
All of this sounds fantastic, but the one problem with Chipotle is its valuation. The company trades for 57x forward earnings estimates, well surpassing valuations of McDonald's and Yum! Brands. They trade for about 20x. I would expect Chipotle to trade at a premium to these fast-food giants -- but not by such a great degree.
So, is this stock split stock a buy? This depends on your investment style. Chipotle's business has proven its strength over time, and the company has room for expansion in North America and even internationally. This could boost earnings well into the future.
For long-term investors favoring growth, Chipotle stock still could deliver solid returns, so you may think about opening a small position in the restaurant giant to diversify your portfolio -- the post-split price offers you the ability to do this more easily. But, considering the stock's steep valuation, value investors may find tastier opportunities elsewhere.
