Chipotle Mexican Grill, Inc. (NYSE: CMG) is conducting its 50-for-1 stock split. Splits are supposed to entice new buyers to buy in cheaper, and usually a stock split is a mechanical effort of a company that lowers its share price but changes nothing about the actual operating metrics after adjusting the share count. That’s the usual story. In the case of Chipotle, this split was imperative for new shareholders because the $3,200 share price ahead of the split cost the same as about 200 meals from each customer.
While it’s easy to ask “Do I buy 200 meals or just one share of stock?” for would-be Chipotle investors, now that the split is taking place the real focus will get back to Chipotle’s growth. Chipotle is now large enough with an $89 billion market cap that it begs a question — Can Chipotle double its store count to justify the premium for its stock valuations?
Chipotle Mexican Grill operates around 3,500 (3,479 last quarter) fast casual Mexican restaurants around the time of its last earnings report. The chain is targeting a footprint of 8,000 stores (1,000 would be international) in 7 years. The menu is quite popular among younger buyers who get to choose from burritos, tacos, burrito bowls and salads.
The BofA “buy” thesis revolves around Chipotle keeping a steady state earnings power and it assumes a future footprint of 7,000 U.S. stores and an
additional 1,000 international stores. BofA’s investment rationale calls Chipotle as one of the few high-growth restaurant companies with numerous appealing attributes that support continued unit growth. BofA also sees the 52-times earnings multiple for 2024, a significant premium to almost all restaurant chains, shrinking to about 35-times earnings for 2026. That’s less aggressive but still expensive for a restaurant chain. Its stores are 100% company-operated and they runs average unit volumes of $2.4 million to $2.5 million, which BofA expects to be up to about $4 million by the time it hits the 8,000 store goal.
CFRA has a Buy rating and a $3,700 price target (pre-split). CFRA sees a favorable risk/reward proposition even with high valuations at present time. The firm sees continued gains from operational efficiencies and an above-average income consumer focus with an ongoing focus on value and quality ingredients. While there are concerns about the broad-based consumer budget pressures, CFRA sees growth and even Middle East expansion helping.
Here are other pre-split price targets from Wall Street firms in calls made just in the last month:
- Wedbush (Outperform) $3200
- Oppenheimer (Outperform) $3485
- Baird (Outperform) $3500
- Argus (Buy) $3888
- TD Cowen (Buy) $3600
- Truist (Buy) $3520
- Goldman Sachs (Buy) $3730
And speaking of growth, there have been some recent complaints that Chipotle’s dish sizes have shrunk while prices have continued to rise. The stance by the company is that sizes have not changed and that the company has reinforced proper portioning with its employees. The company even said that it has communicated how customers can signal to employees when they want bigger portions.
Chipotle is not alone in the notion that fast food prices have become quite pricey. Without asking for chips and guacamole, and without a drink, it’s not too difficult to pay $16.00 for a double-wrap burrito. In fact, that’s more than many non-fast-food casual dining chains charge.
Some of Chipotle’s larger risk outside of food safety is its digital business. In 2023, 37.4% of Chipotle’s food and beverage revenue came from digital orders. That includes third-party delivery, in-store customer pickup and via its Chipotlanes. Chipotle further broke out that approximately 18% of food and beverage revenue in 2023 was via delivery orders through third-party delivery companies.
Fortunately, managing more than 100,000 employees by and large has to be done at the store-level as far as most customers are concerned. Chipotle ended 2023 with 116,068 people worldwide and 1,088 contract workers. Of those, 114,042 worked in the United States and of that figure 112,572 employees worked in the restaurants and another 1,470 employees worked in Chipotle’s support centers.
With shares at $3,247.99 on last look, the post-split share price should be closer to $65.00. Again, most splits are mathematical and that’s all. In Chipotle’s case, now its customers AND its employees can hopefully buy shares at a less costly price per share than in recent years. The last time Chipotle’s stock price was under $1,000 was in May of 2020.
Now Chipotle just has to be able to double its store count in the coming years while maintaining its food prized quality at the same or better margins ahead.
