Chipotle Stock: Buy, Sell or Hold?

Beloved chain restaurant Chipotle Mexican Grill (CMG 1.23%) has gained a reputation for serving delicious flavors and hot returns on investment. The stock has returned nearly 6,000% over its lifetime, far outperforming value S&P 500his proper performance.

However, the stock has recently cooled after Starbucks lured the popular CEO of the company. Strong leadership is essential for companies to perform to their potential, so it’s certainly a loss Chipotle will have to deal with.

However, the stock’s recent decline could be more of an indicator of a buying opportunity than a red flag to sell. Chipotle has the recipe for growth and the opportunities to produce big returns on investments — if the company’s new CEO can pick up where Brian Niccol left off.

Here’s what you need to know about the investment direction for Chipotle right now.

Chipotle’s CEO change probably isn’t a big deal

No one should diminish the positive impact of the former CEO. After Niccol took over as CEO in early 2018, sales doubled and earnings multiplied:

CMG Revenue Data (TTM) by YCharts; TTM = last 12 months.

Niccol came to Chipotle as the former CEO of Huh! trademarks-owned Taco Bell, a competitor with over 7,000 stores at the time. When he took over, Chipotle had just 2,400 stores.

Consumers have long loved Chipotle, but the business’ growth goes beyond that, into areas like supply chain. Given the company’s success, Niccol has done a great job of leading Chipotle to higher ground. Today, the company has approximately 3,530 stores.

That said, investors shouldn’t panic that he’s gone now. Chipotle founder Steve Ellis stepped down as CEO at the end of 2017 and left the company in 2020. Business was fine anyway.

In other words, Niccol did a great job driving the car, even though he didn’t build it. Chipotle is an established brand with a playbook of success. The construction phase is relatively complete. As long as Chipotle’s new CEO sticks to the company’s core values ​​and formula for success, investors should be fine.

Long term growth ahead

What is Chipotle’s formula? It’s a simple business that sells fresh, made-to-order food at an attractive price. Sure, the restaurant business is ruthlessly competitive, but it hasn’t affected the chain’s growth:

CMG Revenue (quarterly YoY growth); data by YCharts. YoY = year over year.

People know the brand and enjoy the product. Growth comes from opening more stores. Chipotle is now international, but the United States remains its core market. All markets eventually get crowded, but the US shouldn’t get to that point for a while.

The company’s 3,530 stores still pale in comparison to others, including Taco Bell, with nearly 8,000 in the US alone. The top 10 restaurant chains in the country have over 3,000 more locations than Chipotle.

Earnings should continue to grow faster than sales as Chipotle uses its profits to buy back stock, driving higher per-share growth and a higher stock price. This profitable recipe for tasty profits should remain intact with new management.

Is the stock a buy, sell or hold?

Chipotle’s simple but profitable business model, growth and well-known brand have a steep valuation. The stock is trading at a forward price-to-earnings (P/E) ratio of 49, even with the stock down more than 20% from its peak.

The question is whether Chipotle can grow fast enough to justify a long-term investor buying shares at these prices. Analysts believe that the company will increase earnings per share by an average of 22% annually in the next three to five years.

This growth makes the stock look quite reasonable today. Consider this Coca colaa similarly beloved consumer-focused company trades today at a forward P/E of 25, but expects to grow revenue by just 6% annually. In other words, Chipotle is more expensive than other stocks, but you’re probably getting it much better increase in earnings.

A long-term investor also has the benefit of time; you can own stocks and let the earnings catch up to the stock price in a year or two. Chipotle isn’t a bargain, but it’s priced reasonably enough that investors can buy this dip and prepare to continue averaging down if the stock continues to decline. The company’s CEO change has created a solid buying opportunity that investors should consider taking advantage of.