Does Chipotle Mexican Grill Still Have Some Firepower Left?
Chandan Khandelwal | Aug 26, 2022 06:51
- In Q2, Chipotle revenue increased 17% and operating margin increased 15.3%.
- It plans to more than double its restaurant count in the coming years.
- The stock's higher growth outlook justifies its premium valuation.
In the last five years, Chipotle Mexican Grill (NYSE:CMG) has outperformed the S&P 500 Total Return Index generating a staggering return of over 450% compared to 85% for the S&P 500 index. And there are several factors that may contribute to the stock’s continued outperformance.
Impressive Performance/h2
In the latest quarter, Chipotle Mexican Grill's revenue increased 17% year-over-year (yoy). Importantly, its operating margin rose to 15.3% from 13% yoy due to menu price increases.
The margin increase reflects Chipotle's ability to pass on higher costs—including increased commodity and labor costs—to customers without significantly denting revenue.
Chipotle’s longer-term performance is equally impressive. Revenue increased at a faster pace than operating expenses allowing a significant jump in operating income. Total revenue posted a , stands at $1,749, which implies an upside of 6% from current levels.
A Solid Long-Term Restaurant Pick/h2
I think that even with higher a PE compared to its peers, Chipotle is a solid restaurant stock that looks well-placed to grow in the coming years. And the stock's valuation is low when compared to its own historical multiple.
Growth in the number of restaurants will drive the company’s topline growth and there is significant potential to improve operating profit margins with more outlets and with more Chipotlanes in the restaurant mix. The restaurant chain's ability to pass on cost increases to customers through menu price increases should also protect margins.
Note: Pricing data used in this article is as of Wednesday, August 24 close.
Disclaimer: The author has no positions in Chipotle Mexican Grill or any other stock mentioned.
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