Is It Too Late To Buy Chipotle Mexican Grill Stock?

Chipotle Mexican Grill's (NYSE: CMG) stock has rallied about 50% over the past 12 months and is currently hovering near its all-time high. The fast-casual restaurant chain repeatedly impressed investors with its robust comparable-store sales growth and expanding margins, even as inflation curbed consumer spending and drove up its labor and food costs.

But is too late to buy Chipotle's stock at these levels? Let's review its growth rates and valuation to decide.

How fast is Chipotle growing?

Chipotle was one of the few restaurant chains that continued to expand throughout the pandemic. In 2020, its comparable-store sales (comps) rose 2%, it opened 161 new restaurants, and its total revenue increased 7%. A lot of that growth was driven by its digital sales, which surged 174% and accounted for 46% of its total revenue.

Its comps climbed 19% in 2021, 8% in 2022, and 8% in 2023. Its restaurant-level operating margin expanded from 22.6% in 2021 to 26.2% in 2023, even as it faced inflationary headwinds, and its number of year-end restaurants increased from 2,962 to 3,437.

Chipotle's steadily rising comps and consistent store openings enabled it expand its revenue at a compound annual growth rate (CAGR) of 18% from 2020 to 2023. Its adjusted earnings per share (EPS) also increased at a CAGR of 21%.

By comparison, McDonald's -- which shed the shares it owned of Chipotle back in 2006 -- only grew its revenue at a CAGR of 10% from 2020 to 2023. But unlike McDonald's, which franchises most of its locations, Chipotle still owns all of its own stores. That approach is more capital intensive, but it allows the company to tightly control its supply chain and individual stores.

Why is Chipotle growing so rapidly?

Chipotle carved out its own niche in the restaurant sector with its fast-casual stores, which are generally pricier than fast-food chains like Yum! Brands' Taco Bell but cheaper than full-service restaurants. It attracted health-conscious consumers with its fresher ingredients, maintained a small menu to streamline its orders and reduce food waste, and continued to expand its digital ordering platform and loyalty program.

To counter the inflationary headwinds over the past two years, Chipotle successfully leveraged the popularity of its brand to raise its menu prices. It also installed more drive-thru Chipotlanes for mobile orders at its stores to accelerate its sales.

For 2024, Chipotle expects its comps to rise by the mid- to high-single digits. It also plans to open 285 to 315 new locations, and for at least 80% of those stores to be equipped with Chipotlanes. Analysts project its revenue and adjusted EPS (excluding its upcoming 50-for-1 stock split) will increase 15% and 24%, respectively, for the full year.

But is Chipotle's stock getting too hot to handle?

Its business is still firing on all cylinders, but Chipotle stock is richly valued relative to its peers at 58 times forward earnings. McDonald's and Yum Brands trade at just 21 and 24 times forward earnings, respectively. Chipotle is expanding faster than those fast-food giants, but it could struggle to maintain its premium valuation if its growth cools off.

Chipotle is consistently buying back its own shares, but its insiders actually sold nearly twice as many shares as they bought over the past 12 months. Pershing Square, billionaire investor Bill Ackman's hedge fund, holds Chipotle as its largest single position, but he has also been gradually trimming its stake over the past year.

I don't think it's too late to buy Chipotle's stock as a long-term investment, but its upside potential could be limited over the next 12 months. It might attract some fresh interest after its stock split on June 6, but there's a bit too much optimism baked into its current valuation. So for now, investors should simply nibble on Chipotle instead of taking a huge bite.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.