With Chipotle Mexican Grill (NYSE:CMG) stock, investors are about to get a real-life lesson on the difference between “more affordable” and “actually cheap.” After all, while stock splits can certainly make an asset easier to fit into one’s portfolio, they don’t automatically make a stock a bargain.
Still, with Chipotle stock up 5% to 6% in pre-market trading today, short-term traders are clearly enthused, regardless of whether the stock’s a bargain or not. It’s a sign of the times perhaps, as some investors view all news as good news — even when valuations aren’t ideal.
Splitting CMG stock into bize-size pieces
Let’s start off with the need-to-know facts. Chipotle’s board of directors just approved a 50-for-one split of the company’s common shares.
As Chipotle Chief Financial and Administrative Officer Jack Hartung points out, “This is the first stock split in Chipotle’s 30-year history.”
It’s amazing when you really think about it that Chipotle took so long to split its stock. CMG stock has traded at over $1,000 per share since the summer of 2020 and is currently almost $3,000 a share.
Nonetheless, I suppose it’s better late than never. Of course, the rationale for the stock split is to make the shares more affordable and therefore more appealing to investors. As Hartung put it, the stock split “will make our stock more accessible to employees as well as a broader range of investors.”
The stock split isn’t official yet as it still requires shareholder approval at Chipotle’s upcoming annual meeting, which is scheduled for June 6. However, in light of this morning’s 6% share-price jump, it certainly appears that Chipotle’s stockholders will approve the split.
Now is a good time to clear up a few things. First of all, the split means that shareholders will receive 49 additional shares for each share held, not 50. If all goes according to plan, those shares will be distributed after the market closes on June 25, and CMG stock will trade on a post-split basis the following day.
Second, stock splits generally don’t make stocks a better or worse value. Just imagine a burrito being cut into small pieces. You’re still getting the same amount of burrito, and the ingredients of that burrito haven’t changed.
Today’s stock traders may be enthused because Chipotle stock could go up as more investors will seek access to it at its soon-to-be more affordable price. On the other hand, by the time you read this, the market’s excitement will probably already be priced into CMG stock.
Actually, the market’s excitement has been priced into the shares for a while now. During the past four years, Chipotle’s share price has soared from $500 to nearly $3,000. Furthermore, Chipotle’s GAAP trailing-12-month price-to-earnings (P/E) ratio stood at around 63 even before today’s share-price jump.
Burritos are selling like hotcakes
In case you haven’t noticed, fast food has gotten pretty expensive over the past year or two. One might assume that high food prices would deter customer traffic at Chipotle, but the company’s fourth-quarter fiscal 2023 data proves otherwise.
As it turns out, the company’s comparable-restaurant sales increased 8.4% year over year, versus Wall Street’s call for 7.1% growth. Moreover, Chipotle opened 121 new restaurants during Q4. CEO Brian Niccol’s stated goal is to reach “7,000 restaurants in North America.”
Apparently, Chipotle’s customers are hungry for burritos irrespective of their prices. The proof is in the results as Chipotle’s quarterly revenue grew 15.4% year over year to $2.5 billion, which was in line with analysts’ consensus estimate. Chipotle also reported quarterly earnings of $10.21 per share, up 27.3% year over year and ahead of Wall Street’s consensus forecast of $9.71 per share.
Chipotle cited the “benefit of menu price increases” in its press release, though its customers certainly wouldn’t consider price hikes to be a “benefit.” If people are willing to pay more for those burritos though, then evidently, the price increases will continue to benefit the company’s top and bottom lines.
In light of this, Chipotle’s P/E ratio may be a little bit easier to swallow. Still, value-hungry investors might want to look elsewhere as Chipotle’s sales and income growth, while impressive, probably don’t justify the astonishing share-price rally that’s happened since the COVID-19 pandemic low.
Thus, even if CMG stock will soon be cut up into more digestible pieces, the valuation may be too hot and spicy for some value-conscious investors to tolerate.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
