Chipotle Mexican Grill (NYSE: CMG) has long been regarded as a leading growth stock in the restaurant sector, boasting a remarkable 300% increase in share value over the past decade. However, recent developments have raised concerns among investors.
The company recently lost its CEO, Brian Niccol, who left to join Starbucks. Despite the excitement surrounding Chipotle’s recent 50-for-1 stock split, its shares have dropped 13% in the past three months. This situation has led to questions about whether Chipotle’s stock is in trouble or if this decline presents a buying opportunity.
Strong Growth Prospects Remain
While many restaurants have struggled to grow their revenues without significant price hikes, Chipotle has bucked this trend. In its latest earnings report from July, the company announced an 18% increase in quarterly revenue, reaching $3 billion for the period ending June 30.
Additionally, same-store sales grew by 11%, primarily driven by increased customer transactions and modest price increases.
Achieving double-digit growth in same-store sales is a significant accomplishment in the restaurant industry, where many establishments settle for single-digit increases. Chipotle’s growth is particularly notable as it is largely driven by increased customer traffic, providing a clearer picture of its organic growth.
Leadership Change Not Necessarily Negative
The announcement of Niccol’s departure initially led to negative sentiment among investors. However, this change in leadership does not automatically signal trouble for the company. Niccol’s move to Starbucks was likely due to an attractive compensation package that he could not refuse.
Chipotle’s interim CEO, Scott Boatwright, has been with the company since 2017 and previously served as its chief operating officer. His familiarity with the brand and its operations suggests continuity in leadership. Investors can be reassured that Boatwright has been instrumental in Chipotle’s recent success and is likely to maintain the company’s growth strategy.
Investment Considerations
Despite concerns about the CEO’s departure, investors should not overlook the potential for Chipotle’s stock to rebound. If the stock price continues to decline, it may create an attractive buying opportunity for those looking to invest in a strong restaurant chain.
Currently, Chipotle trades at a high valuation, with a price-to-earnings (P/E) ratio of 50 times its estimated future earnings.
This elevated valuation may be a reason for caution, rather than the leadership change itself. A price correction seems overdue, given the stock’s high premium.
For long-term investors, Chipotle may still present a good buying opportunity, but it may be wise to wait for further declines in stock price. A lower earnings multiple could provide a margin of safety and increase the likelihood of achieving favorable returns.
Conclusion
Before investing in Chipotle Mexican Grill, potential investors should consider the current market landscape. Notably, the Motley Fool’s Stock Advisor team has highlighted ten other stocks they believe are better investment opportunities at this time. Investors should weigh their options carefully before making a decision regarding Chipotle stock.