Is Chipotle a bad buy right after the 50-for-1 stock split? The answer may surprise you.

The time has finally come. On June 16, the shares of Chipotle Mexican Grill (NYSE: CMG) was subjected to a close and historic 50-to-1 stock split. The stock’s previous four-figure price tag is currently at around $65.

Management thought this was the right proposition, given how well the restaurant company’s stock has been doing. They have grown 44% in 2024, and in the last five years, they have grown by 348%.

Is this great? restaurant stock a no-brainer investment opportunity right after the 50-for-1 stock split?

No fundamental change

Stock splits usually occur after a company’s nominal share price becomes too high. Of course, that’s a good problem for Chipotle, because it means the stock has done well for investors over the years. But by artificially lowering the price, the stock can be accessible to more investors.

Chipotle’s outstanding shares expanded 50-fold to 1.4 billion. And the share price is now 1/50th of what it was before this event. It’s helpful to think of this situation as a pizza being cut into smaller slices.

It’s really important to remember that from a fundamental perspective, nothing has changed with Chipotle. This is still the same business it was yesterday. Through its fast-casual stores, this company still sells Tex-Mex food like bowls and burritos.

Since the executive team first announced the stock split in March, the stock has risen 17%. Perhaps the anticipation of this happening is exactly what has fueled even greater bullish sentiment from the market.

Reduce your appetite

As we look at the company and stock today to assess whether Chipotle is a no-brainer investment opportunity, it’s critical to consider the quality of the company. This is a stellar business.

The company continues to post strong financial results despite ongoing macro challenges. After revenue grew 14.3% in 2023, it rose 14.1% in the first quarter of 2024 (ended March 31). This was driven by same-store sales growth of 7%, as well as the opening of 47 new restaurants.

Chipotle is extremely profitable, which is supported by its proven pricing power. In the last five years, the company operating margin has an average of 11.5%. And from a store-level perspective, 27.5% of revenue was turned into operating profit in the first quarter, a remarkable number.

There is still much growth to be achieved. Management sees the potential to open 7,000 stores in North America one day, roughly double the current footprint. This target is higher than the previous target of 6,000, so it tells you that the management team is extremely optimistic about Chipotle’s long-term prospects to further penetrate its core market.

All of these positive factors may lead you to believe that this stock is an unreasonable buying opportunity. However, consider how high the expectations have been raised. I find it outrageous to pay a price-to-earnings (P/E) ratio of 70.1 for this business’s stock. There is no margin of safety for investors if the company posts quarterly financial results that the market is not happy with for whatever reason.

Of course, volatile trends can last much longer than people might think. And that may be the case with Chipotle stock, as it has been trading at a high valuation for a while.

Not only do I think the stock should be avoided, but I’m also not comfortable calling this a no-brainer investment opportunity right now. Perhaps if the P/E multiple falls below 30, I would adopt this view. However, this may not happen for a long time.

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

Is Chipotle a bad buy right after the 50-for-1 stock split? The answer may surprise you. was originally published by The Motley Fool

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