Chipotle stock (CMG) has fallen over 24% since its 52-week high, and it may be time to buy on the dip. Shares of the previously red-hot stock had started to decline this summer as the excitement over the stock split died down and growth stocks generally cooled. Then news that highly respected CEO Brian Niccol would be leaving the company to take the helm at Starbucks (SBUX) made matters worse. The stock fell 7.5% the day the news was announced.
However, with shares down significantly, the stock is worth a closer look. I’m bullish on Chipotle because the entry point is more attractive, the company still has significant long-term growth ahead of it, and it has been able to successfully hold its own while its restaurant competitors have struggled. Additionally, Niccol’s departure is certainly a blow, but the company should be relatively well positioned to weather it. Finally, sell-side analysts see significant upside potential for the stock.
Not cheap, but more attractive
The stock certainly isn’t cheap, trading at 48.1 times 2024 earnings estimates, although it’s much cheaper than it was just a few weeks ago following the sell-off. The valuation also drops a bit into 2025, as the company is expected to earn $1.30 per share and trades at 40.5 times those estimates.
Putting the current crisis aside, there are still many positive aspects to the stock. First, it is one of the few stocks in the industry that is seeing increasing sales and more customers despite a difficult business environment for restaurants.
Many restaurants are reporting declining sales and fewer customers as consumers feel the effects of inflation and spend less on non-essentials like eating out. But that’s not the case at Chipotle, which has handled these challenges with flying colors.
For the second quarter, the company reported an impressive 8.7% increase in foot traffic and outstanding comparable-store sales growth of 11.1%. By comparison, Starbucks, Niccol’s next stop, reported a 3% decline in comparable-store sales last quarter.
This metric is important because it shows that sales are increasing at Chipotle’s existing stores that have been open for at least a year, which is a good sign of sustainable long-term growth. It also shows that Chipotle isn’t just growing by opening new stores while existing stores languish.
But in terms of location growth, the outlook there is still pretty good. The company plans to increase its store count by 8-10% over the long term, with the goal of eventually having 7,000 restaurants. That would be nearly double its current footprint. While some investors may feel they’re late to the game on Chipotle, there’s still plenty of growth potential and the current decline creates an attractive entry point for this compelling long-term growth story.
In good hands
While Niccol’s departure is certainly a coup for Starbucks and a loss for Chiptole, it may not be as bad as it seems at first glance. Legendary investor Bill Ackman is one of the top 10 holders, owning 28.8 million Chipotle shares. He wrote, “While we are disappointed to see Brian go, one measure of a great CEO is the company he leaves behind… Brian has built an exceptional team at Chipotle that we expect will be undiminished by his departure.”
Ackman is right when he says that a great CEO builds a strong team. And part of that strong team is new interim CEO Scott Boatwright, who previously served as COO. While we don’t know if Boatwright will get the job permanently, I like this appointment. Many of the recent improvements at Chipotle are operational in nature, like the mobile ordering system and the launch of “Chipotlanes.”
Customers use the app to order ahead and then pick up their order at Chipotlanes at set times. This reduces wait times (a major problem for many drive-ins) and increases throughput. Currently, only 24% of Chipotle locations have drive-ins, so there is potential for further growth and improvement here.
It remains to be seen what happens next, but it seems Niccol has left the company in capable hands.
Is CMG stock a buy according to analysts?
As for Wall Street, CMG receives a Moderate Buy consensus rating based on 17 Buy, nine Hold, and zero Sell ratings over the past three months. The average price target for CMG stock of $63.05 implies an upside potential of 19.8% from current levels.
View more CMG analyst ratings
outlook
I’m bullish on Chipotle because the company still has significant growth ahead of it. While the stock isn’t cheap yet, it has certainly gotten cheaper and could continue to increase in value if the company continues to grow its earnings. In addition, the stock has continued to put up impressive numbers while other restaurants struggle with inflation and other challenges.
And while Niccol’s departure may not have been welcome news for many investors, the company appears well positioned to succeed following his departure. Investors like Bill Ackman believe Niccol has left the company in strong shape under Boatwright’s leadership.
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