Stock Market Sell-Off: Is Chipotle a Buy?

Investors endured a brutal 2022, with the S&P 500 down by approximately 19.4% for the year. The market’s current state brings with it a significant reluctance to invest, but it also offers up some great buying opportunities for those willing to brave the ongoing bear market.

One company that has held up well during this time is Chipotle Mexican Grill (CMG 0.36%). It continued to add stores and grow revenue, even as investors dumped the stock. That has led to questions about whether Chipotle stock is now a compelling buy, or whether it remains a restaurant stock to avoid. Let’s see if we can find the answer.

The state of Chipotle

Chipotle prospered by pioneering a healthy fast-food niche and executing wise strategic pivots. It also benefited from a little good fortune. Although founder Steve Ells no longer runs the company, CEO Brian Niccol has built on the founder’s concept. Niccol addressed issues around food contamination in prior years and he continued the company’s rapid expansion.

More recently, Chipotle launched and perfected its customer app and added Chipotlanes to many stores that serve the chain well during the ongoing COVID-19 pandemic. Those moves helped to prevent revenue levels from crashing in 2020 despite the temporary suspension of dine-in service.

Chipotle’s latest effort to attract and serve customers is the introduction of Lifestyle Bowls. These pre-determined recipes allow customers to eat bowls based on dietary preferences, such as keto, grain-free, and other options. Although such moves may not directly bolster the stock, it gives customers another reason to order from Chipotle.

What will likely boost the stock is the continued store growth. Chipotle ended the third quarter with nearly 3,100 restaurants, up from just under 2,900 in the year-ago quarter.

And despite adding a modest number of locations in Canada and three European countries, it remains primarily focused on the US, believing it can support as many as 7,000 US locations. So far, management has forecast 255 to 285 new store openings for 2023. That indicates Chipotle’s expansion can carry on for decades.

Financials and valuation

Those added stores offer an added boost to Chipotle’s revenue growth. In the first nine months of 2022, the company generated nearly $6.5 billion, 16% more than in the same period in 2021. And Chipotle accomplished this at a time when the rising costs of food inputs and labor forced it to raise prices.

Also, Chipotle reported $675 million in net income for the first three quarters of 2022, a 30% increase over the same period. The growth of its gross margin to more than 13% (versus under 12% in the year-ago period) helped raise earnings.

Unfortunately for investors, that improvement did not help Chipotle stock escape the bear market. Since peaking in September 2021, the stock has fallen by about 30%.

Moreover, its earnings multiple may not reassure investors. Indeed, its P/E ratio of 48 fell from 74 about one year ago and has dropped to its lowest level since the beginning of the pandemic in early 2020.

However, Chipotle stock remains considerably more expensive than industry peers such as McDonald’s and El Pollo Loco. Those stocks sell for 33 and 17 times earnings, respectively, a factor that could make some investors hesitant to choose Chipotle.

Should investors buy Chipotle shares?

Despite that heightened valuation, investors may want to consider adding shares. The last time the P/E ratio fell to this level, a recovery followed. Additionally, the company appears largely immune from inflation as it maintains its double-digit revenue growth. Considering Chipotle’s enduring ability to add restaurants and increase sales, its expansion will likely continue for years to come.

Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

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