My prediction for what’s to come

There has just been a big shake-up Chipotle Mexican Grill (NYSE: CMG). Chief Executive Officer (CEO) Brian Niccol has just announced a surprise departure in Starbucks. Niccol has been instrumental in securing a turnaround for Chipotle after its foodborne illness outbreaks, driving the stock to 800% returns since joining in 2018, making it one of the world’s best-performing stocks during that time .

Leaving a company — especially for a competitor — will always upset investors. It’s no surprise, then, to see Chipotle shares fall on the news. In fact, the stock is down 25% since the recent June stock split. This isn’t Chipotle’s worst discount ever, but one of the most significant in the last 10 years. Here’s my prediction for what’s next with the end of the Brian Niccol era.

A surprising CEO exit

On August 13, Starbucks announced that it had hired Brian Niccol, away from Chipotle, as CEO, effective immediately. This was a shocker for two reasons. First, Starbucks didn’t previously tell investors it was looking for a new CEO. Second, Chipotle’s valuation was similar to that of Starbucks at the time of the announcement, with a market capitalization of between $75 billion and $100 billion. It also has a clearer path to store expansion and has delivered much better performance in recent years compared to the coffee giant.

So why did Niccol go to Starbucks? We may never know the real details, but it sounds like Niccol thought Chipotle was in a great place and was now looking for his next big project. After Niccol arrived at Chipotle in 2018, he righted the ship after terrible outbreaks of foodborne illness in its restaurants.

The stock has returned more than 800% for investors since he took the reins, crushing Starbucks’ returns over the same time period. Niccol can see more ways to improve Starbucks’ business and is comfortable with the culture it has built. Or, it could just be the money.

Either way, this shouldn’t be considered a blow to Chipotle’s business. In fact, it says the opposite. Chipotle’s business has thrived in recent years, posting positive same-store sales growth every year since Niccol took over, even during the COVID-19 pandemic. That’s why the stock is trading at a price-to-earnings (P/E) ratio above 50. Investors are optimistic about the future for Chipotle.

Hiring the new CEO is a vital decision

The hiring of the new CEO will be an important moment for Chipotle investors. Management changes always come with uncertainty, especially with delicate operations like restaurants. The new leader won’t be in such a tough spot as Niccol in 2018, with Chipotle’s business firing on all cylinders right now while Niccol has had to rebuild the brand after food poisoning. In fact, the biggest risk is that the new CEO will change Chipotle’s strategy and make things worse. You might say it’s impossible to screw up its burrito and Mexican bowl formula, but you’d be surprised how often management can take a toll on a once-beloved business.

I’ve seen it happen many times before. Starbucks has struggled several times in the past when longtime CEO Howard Schultz left the company. Even outside the restaurant industry, Disney it went through bouts of inconsistent managers that hampered operations. There’s no guarantee the new CEO will break Chipotle’s momentum. But there’s no guarantee they’ll succeed either. There is uncertainty today, unlike Niccol, who investors had great confidence was a strong leader.

CMG Revenue (TTM) data by YCharts.

What’s next for the stock?

There are three possible outcomes for Chipotle and its new CEO. They either improve, maintain, or affect Chipotle restaurant operations. Given that Brian Niccol might be the best leader in the entire restaurant industry, I doubt a new CEO can significantly improve Chipotle’s business here. It may continue to grow the number of restaurants in operation (3,530 at the end of last quarter) for a long time, but there’s only so much you can do to optimize the restaurant business, especially if the company has exhausted its opening possibilities of new restaurants in privileged locations. It’s a simple model at the end of the day.

So Chipotle will either maintain its stellar performance or get worse under the new CEO. However, even if Chipotle maintains its excellence, I think investors should be cautious about the stock. It trades at a P/E of 53, which is roughly double the S&P 500 average of the index.

Assuming sales and net profit grow 100% over the next five years (the former has grown at the same rate over the past five years), it’s hard to argue that the stock is worth owning. Assuming consistent profit margins, this would only drive Chipotle’s P/E down to 26.5, which isn’t cheap on a five-year forward basis.

Add it all up, and it looks like Chipotle stock is priced with plenty of upside and high expectations for the next few years, regardless of who the CEO is. Despite its strong historical performance, this indicates investors should not buy Chipotle stock. Keep it on your watch list for now.

Should you invest $1,000 in Chipotle Mexican Grill right now?

Before buying stock in Chipotle Mexican Grill, consider the following:

The Motley Fool Stock Advisor the analyst team has just identified what they think they are 10 best stocks for investors to buy now… and Chipotle Mexican Grill was not one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you would have $792,725!*

Stock advisor provides investors with an easy-to-follow blueprint for success, including portfolio construction guidance, regular updates from analysts, and two new stock picks every month. The Stock advisor the service has more than four times return of the S&P 500 since 2002*.

See the 10 stocks »

*The stock advisor returns starting August 22, 2024

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 put on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.