If you’re going to do something, do it big. That appears to be the mindset of Chipotle Mexican Grill‘s (NYSE: CMG) board of directors.
Last Tuesday, Chipotle announced that its board approved a 50-for-1 stock split. It’s not a done deal just yet. Shareholders must approve the stock split at the annual meeting scheduled for June 6. However, assuming there are no roadblocks, the Mexican restaurant chain will split its shares after the market closes on June 25. Should you buy Chipotle stock before its ginormous 50-for-1 stock split?
One of the biggest stock splits ever
Before we address whether to buy Chipotle stock, let’s first look at the historic nature of the company’s upcoming move. Chipotle noted in its press release last week, “This would be one of the biggest stock splits in New York Stock Exchange (NYSE) history.”
Why is Chipotle’s stock-split ratio so unusually high? For one thing, the restaurant chain has never conducted a stock split in its 30 years of operations. Companies that conduct stock splits more frequently typically will have lower stock-split ratios.
The main reason, though, is simply that Chipotle stock has skyrocketed over the years. Its share price currently hovers at a little under $3,000. Such a high share price makes a 50-for-1 stock split practical.
Chipotle’s motivation for splitting its shares isn’t surprising. Chief Financial and Administrative Officer Jack Hartung said, “[W]e believe this will make our stock more accessible to employees as well as a broader range of investors.”
Reasons to consider buying Chipotle stock
Should those Chipotle employees and other investors consider buying the stock? There are several reasons the answer could be “yes.”
Chipotle’s business is booming. In the fourth quarter of 2023, the company’s revenue jumped 15.4% year over year to $2.5 billion. This increase wasn’t just the result of Chipotle opening a record number of new restaurants. Same-store sales at its existing restaurants rose 8.4%.
The company’s adjusted earnings per share soared 25% higher in Q4. This performance was made possible in part by an impressive improvement in operating margins at the corporate and restaurant levels.
Investors should also like that Chipotle is expanding into international markets. The company opened its first restaurant in Calgary, Canada, in 2023. It plans to open between 10 and 14 new restaurants in Canada this year. Chipotle also signed its first international partnership in 2023, teaming up with Alshaya Group to open restaurants in the Middle East.
However, the primary growth opportunity for Chipotle is still in North America. CEO Brian Niccol said in the Q4 earnings call that he believes the company will be able to “more than double our restaurants in North America” over the long term. He also thinks that Chipotle will be able to further increase its industry-leading profit margins.
Two glaring omissions
There were two glaring omissions from the reasons I mentioned for buying Chipotle stock. One is the upcoming stock split. I think it’s possible that the split could cause shares to jump even more than they already have. But even if shares rise, the impact will likely only be temporary. Stock splits change nothing about the fundamentals of a company’s business or prospects.
The other thing not referenced above is Chipotle’s valuation. The stock currently trades at a forward price-to-earnings ratio of 52.6. Although Chipotle continues to deliver strong growth, it’s not growing fast enough to justify that premium multiple, in my view.
I don’t think investors should buy Chipotle stock before its ginormous 50-for-1 stock split. I don’t think they should buy the stock after a split, either. There are too many other stocks that offer better bang for the buck.
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Keith Speights 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.
Should You Buy Chipotle Stock Before Its Ginormous 50-for-1 Stock Split? was originally published by The Motley Fool
Source: finance.yahoo.com