Chipotle Mexican Grill (NYSE:CMG) recently reported strong Q2 2024 results. Yet Chipotle stock barely budged.
On the top line, its revenue was $2.97 billion, $30 million higher than Wall Street’s estimate, while its earnings per share were 34 cents, two cents better than the consensus. The company’s earnings were up because of price hikes kicking in.
From where I sit, Chipotle is the best publicly traded restaurant stock in America. The company’s food scare – it served bad food and made more than 1,100 people sick in the U.S. between 2015 and 2018 – is long behind it.
Chipotle paid a $25 million criminal fine in 2020 but had to implement a food safety program as a result.
What do they say, “It’s not what happens to you that matters, it’s how you handle what happens that does.” Chipotle put itself in a position to win from losing.
Flash forward to today. Chipotle stock should be worth over $51.
Here are three reasons why.
Chipotle Stock Up 702% Since Brian Niccol Joined in 2018
CEO Brian Niccol joined Chipotle in March 2018. He was given the Chairman’s title two years later in March 2020. Niccol joined Chipotle from Taco Bell, where he was CEO of the brand from 2015 until taking the top job at CMG.
In November 2018, I suggested that eight months into his new gig, Niccol had the company on the road to recovery.
“In my March 2017 article, I wondered if activist investor Bill Ackman would sell his Chipotle stock after making very little money on it. I concluded that Chipotle’s turnaround was working. If I could see that, Ackman, with seats on the board, definitely was aware of it,” I wrote.
At the time, Ackman likely owned over two million shares of CMG stock. Because of its 50-for-1 stock split in June, Pershing Square Capital Management now owns 37.2 million shares worth over $2.1 billion. It is the investment firm’s largest holding.
Thanks to Niccol’s leadership and focus on execution Ackman’s a little wealthier.
For example, recently Niccol dealt with the complaints about the differing portions from one burrito bowl to the next by stating that it had identified 10% of its stores in need of retraining and will do so.
Double Digit Same Store Sales
The most impressive part of its Q2 2024 report was its double digit same store sales growth of 11.1%, 190 basis points higher than analyst expectations. The big jump was helped by an 8.7% increase in transactions along with a 2.4% jump in the average check.
“The second quarter was outstanding as successful brand marketing, including the return of Chicken Al Pastor, drove strong demand to our restaurants,” Niccol said in the company’s Q2 2024 news release.
“Our focus and training around throughput paid off as we were able to meet the stronger demand trends with terrific service and speed driving over 8% transaction growth in the quarter.”
The stock may have been held back by Niccol’s comments that SSS growth peaked in April with its June growth around 6% and July a tough one to call because of various headwinds in the quarter.
However, in 2024, it still expects SSS growth in the mid to high-single digits, while opening 300 new stores, 80% with drive-thru Chipotlanes.
What’s not to like?
Valuation Is Reasonable
Chipotle currently has an enterprise value of nearly $74 billion. That’s about 35x its EBITDA (earnings before interest, taxes, depreciation amortization). While that seems expensive, it’s still less than the five-year average of 40x.
Between 2021 and 2023, Chipotle’s annual revenue growth was 18.2% with 69.4% annual operating income growth.
While it has no long-term debt, its operating lease liabilities were $4.28 billion as of June 30. That’s a low 6% of its market capitalization. That compares favorably to McDonald’s (NYSE:MCD) whose total debt as of Q1 2024 was $53.09 billion, or 29% of its $181 billion market cap.
However, their different business models account for some of the difference: McDonald’s owns about 45% of the land on which its locations sit and 70% of the buildings, whereas Chipotle leases all its locations in an asset-light approach.
Where they are similar is the price-to-sales ratio. Chipotle trades at 6.7x sales while McDonald’s trades at 7.2x sales.
If I were to own a restaurant stock, which I don’t, these are the two I’d consider, but would lean toward Chipotle because of its asset light business model.
Chipotle stock is a long-term buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.