Restaurant chains that combine great food with strong brand recognition tend to outperform the broader market. That is because such a combination keeps customers coming back for more, which drives revenues and profits higher.
Mexican fast-casual restaurant operator Chipotle Mexican Grill(NYSE: CMG) arguably fits this description to perfection. A $1,000 investment made in the company 10 years ago would be worth $5,500 today. That's especially impressive compared to the $3,300 that the same amount invested into the S&P 500 index then would now be valued at (with dividends reinvested). For context, that even includes the more than 1,100 cases of Norovirus, Salmonella, and E. coli that sickened Chipotle customers between 2015 and 2018, and weighed on the stock price for several of those years.
But is Chipotle stock still a buy for growth-oriented investors?
A business that's operating smoothly
Mexican food is among the most loved ethnic foods in the world. And shy of Yum Brands' Taco Bell, nobody has capitalized on this as much as Chipotle: The company has more than 3,200 restaurants located throughout the U.S., Canada, the United Kingdom, France, and Germany. Chipotle's $59 billion market capitalization positions it as the most valuable restaurant chain in the world besides McDonald's(NYSE: MCD) and Starbucks(NASDAQ: SBUX).
The secret to Chipotle's success is largely rooted in the fact that it doesn't take shortcuts: For one, its food contains no artificial flavors or preservatives and is made fresh every day. This is precisely how, even with U.S. inflation remaining above the Federal Reserve's target range, Chipotle continued to deliver satiating results to its shareholders.
As traffic to its restaurants increased and the company passed its higher costs onto its customers with price hikes, comparable restaurant sales surged 10.9% year over year in the first quarter. Alongside its growing restaurant count, this propelled its revenue 17.2% higher to $2.4 billion for the quarter. And Chipotle's non-GAAP (adjusted) diluted earnings per share (EPS) rocketed by 84.2% to $10.50.
That impressive growth should continue, because even as Chipotle opens hundreds of new restaurants each year, it has had no store closures in the last two quarters. This indicates that the market is far from being saturated with Chipotle's locations, which is why analysts think adjusted diluted EPS will soar at an annualized rate of 25.2% over the next five years -- well above the restaurant industry's average forecast growth rate of 14.5%.
Aside from new store openings, the company is improving its customer experience to help boost existing store sales moving forward. Recent updates to the Chipotle app to alert users when they are ordering from or heading to the wrong location have lowered refund rates related to the guest arriving at the wrong restaurant. Chairman and Chief Executive Officer Brian Niccol described these types of incidents as being one of the most frequent reasons for a guest refund request for digital orders, which made up 39% of the company's total sales in the first quarter. Thus, this is an encouraging step in the right direction for Chipotle. The company also has experienced tremendous success with its loyalty program, having grown it to 33 million rewards members in the first quarter. The personalized free rewards that the program provides to members should continue to do a great job at strengthening customer engagement for Chipotle at its restaurants.
Seeing as there are still tons of markets Chipotle has not yet entered, the company will need significant capital to sustain its growth. Fortunately, the California-based chain should have no difficulty in opening many more stores. It is predicted that Chipotle's net cash position will rise to $752 million in 2023. Against the $1.9 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) that is projected for 2023, this is a sizable cash position.
Chipotle stock could still be a buy
Chipotle stock has roared upward by 50%-plus so far in 2023, which could lead a reasonable investor to assume its valuation may be stretched. And its forward price-to-earnings ratio of 39.9 is significantly higher than the restaurant industry's average of 24.7. But taking its almost industry-doubling growth profile into account, the valuation may be sensible. Based on Chipotle's winning track record and fundamentals, I believe growth investors should think about slowly adding to their positions in Chipotle over time.
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