Chipotle Stock Is 'Red Hot'

Shares of casual dining chain Chipotle Mexican Grill Inc. (CMG) have added a great deal of spice to investors' portfolios over the past year. Last week, the stock reached its highest level since 2015. During trading on April 1, 2019, Chipotle hit a new 52-week high of $715.62, 133% above its 52-week low, and closed the day's trading at $705.74. See table below for more aspects of this sizzling performance.

Savory Gains

(Chipotle Stock Performance Through April 1, 2019)

  • Up 63% year-to-date
  • Up 84% since Dec. 24, 2018 intraday low
  • Up 129% from 52-week low
  • Up 946% since April 1, 2009

Source: Yahoo Finance

Significance For Investors

Current CEO Brian Niccol, formerly of rival chain Taco Bell, took over from Chipotle founder Steve Ells in March 2018. "Brian and his team have done an incredible job transforming Chiptole," as activist shareholder Bill Ackman, CEO of Pershing Square Capital Management, told Bloomberg.

In particular, same store sales are growing again, a key metric for retailers. They were up by 6.1% in 4Q 2018, including 2% transaction growth, according to Restaurant Business. One driver of this growth has been digital sales and delivery, which new marketing efforts have been promoting.

"The company just lost focus and wasn't executing. Sometimes the growth gets ahead of the organization and the capability and you just don't realize it until it's too late," Niccol observed to Bloomberg. That lack of focus included restaurants running out of cutlery. He overhauled the executive team and eliminated two layers of management to speed up decision making, per a letter to Pershing investors by Ackman, as cited by Restaurant Business.

Niccol has instituted procedures to ensure safe food handling and preparation, while also increasing average service speed from 20 to 35 orders per 15 minutes. He plans to double Chipotle's U.S. locations, while also expanding internationally, where the chain currently has a limited presence. He's also introducing new menu items, such as quesadillas, to keep the brand relevant and attractive. Additionally, the company finally has a loyalty program to encourage repeat customers, and is promoting mobile payments through Venmo, as described in another Restaurant Business article.

While acknowledging that Chiptole is "red hot" and may continue to be so based on projections of "double-digit profit growth for the next three years [and its plan] to open 150 stores this year," Erin Gibbs, a research analyst with S&P Global Market Intelligence, told CNBC that it's "a little pricey at this point." The stock has a trailing P/E ratio of 112 and a forward P/E of 46, per Thomson Reuters data as reported by Yahoo Finance.

Looking Ahead

Given valuations that are "very extended," Gibbs worries that "anything can send this stock plummeting," noting that the shares have been hammered by food safety concerns related to an E. coli outbreak in 2015, then by a customer credit card data breach in 2017. She would be more comfortable buying at $615.

While new menu items such as quesadillas can increase the brand's appeal, expanding the menu runs the risk of making wait times longer once again. Also, loyalty plans need to crafted carefully, to ensure that they actually spur additional spending by customers.