Since this decade began, volatility has ruled the roost on Wall Street. All three of Wall Street’s major stock indexes traded off bear and bull markets in successive years, beginning in 2020.
During periods of uncertainty, it’s not uncommon for investors to flock to time-tested, profitable businesses that have outperformed the benchmark S&P 500 over the long run. It’s why the FAANG stocks have been noteworthy for a decade.
But over the past two years and change, it’s companies enacting stock splits that have really caught the attention of the investing community.
Investors have gone head over heels for stock-split stocks
A “stock split” is an event that allows a publicly traded company to alter its share price and outstanding share count by the same magnitude. Keep in mind that it’s a purely cosmetic change, as neither market cap nor the company’s operating performance is affected.
Though there have been a few examples of reverse-split success stories (e.g., Booking Holdings), most investors focus their attention on high-flying stocks conducting forward-stock splits. A forward split is designed to make a company’s share price more nominally affordable for investors who may not have access to fractional-share purchases with their broker.
Since the midpoint of 2021, close to a dozen high-profile businesses have conducted forward splits, including artificial intelligence (AI) titan Nvidia, e-commerce behemoth Amazon, and brick-and-mortar retail juggernaut Walmart.
Last week, fast-casual restaurant chain Chipotle Mexican Grill (NYSE: CMG) announced it would be joining this elite group of outperformers. Assuming its shareholders approve the company’s proposed 50-for-1 forward split, it’ll take effect prior to the opening bell on June 26.
While stock-split stocks have generally proved unstoppable in recent years, there are reasons to be believe Chipotle’s returns won’t be so hearty moving forward.
Chipotle’s valuation is an eyesore
There’s no denying that certain core aspects of Chipotle’s operating model have resonated with consumers. The company’s use of locally sourced vegetables (when applicable) and responsibly raised meats speaks to the growing number of people eager for perceived-to-be higher-quality foods. Just as consumers willingly shelled out more money for organic products in grocery stores in the early 2000s, Chipotle has found that its customers are willing to absorb sizable price hikes to eat its fresh meals.
Innovation has also helped catapult Chipotle Mexican Grill from its initial public offering price of $22 in January 2006 to its closing price of roughly $2,882 per share on March 22, 2024. A perfect example is the 2018 debut of drive-thru lanes dedicated to mobile orders, known as “Chipotlanes.” Keeping its menu relatively small and adding Chipotlanes to newer locations ensures an efficient ordering process that can lift margins.
Unfortunately, Chipotle’s valuation is an eyesore. Although food is a necessary good that’s going to be purchased in any economic climate, Chipotle is valued at nearly 45 times Wall Street’s consensus earnings per share (EPS) for 2025. For context, this is almost twice the average forward-year multiple of 24 for S&P 500 restaurant stocks (as of March 2024).
To add to the above, Chipotle’s growth isn’t nearly as impressive once new restaurant openings are backed out of the equation. For instance, total sales in 2023 jumped 14.3%, but only 7.9% on a comparable-store basis. Out of this 7.9%, 2.9% was due to “an increase in average check.” In other words, Chipotle’s 45X forward-year earnings multiple is based on a 5% organic increase in transactions. It could take years of sustained double-digit sales growth (including new restaurant openings) for Chipotle to justify its current market value, let alone push its share price higher.
Rather than chase the stock of a fully valued restaurant chain, investors should consider buying shares of two potential stock-split stocks that are notably cheaper.
Meta Platforms
The first inexpensive stock that could be primed for a split is none other than social media colossus Meta Platforms (NASDAQ: META). Since going public in 2012, Meta’s board has never enacted a stock split.
Although Meta has benefited from its AI ties over the past year — the company is developing augmented/virtual reality devices and anticipates being a lead on-ramp to the metaverse — its foundation remains its social media real estate. Facebook is the most-visited social site globally, with 3.07 billion monthly active users (MAUs) during the December-ended quarter. Instagram, WhatsApp, Threads, and the company’s other apps, increase its MAU count to nearly 4 billion. There’s not a social media platform that comes close to reaching as many users as Meta, which should help the company’s ad-pricing power more often than not.
This is also a good time to mention that ad-driven companies like Meta benefit from disproportionately long periods of economic expansion. Although recessions are an inevitable aspect of the economic cycle, no U.S. recession over the last 78 years has stuck around longer than 18 months. On the other side of the coin, periods of growth usually last for multiple years.
Meta is also working with an enviable pile of cash. It closed out 2023 with $65.4 billion in cash, cash equivalents, and marketable securities, and generated more than $71 billion in cash from operations. This gives the company ample flexibility to innovative, repurchase its stock, and navigate short-lived recessions.
Despite being within a stone’s throw of its all-time high of $523, Meta stock is valued at 24 times forward-year earnings and boasts a price-to-earnings-growth ratio (PEG ratio) of close to 1. A PEG ratio near 1 has historically signaled an “undervalued” business.
AutoZone
The other potential stock-split stock that makes for a more attractive buy than Chipotle is auto parts retail chain AutoZone (NYSE: AZO). AutoZone hasn’t split its stock since April 1994, with a single share setting investors back nearly $3,240, as of March 22.
One reason AutoZone stock has been virtually unstoppable is because Americans are keeping their vehicles longer than ever before. In May 2023, S&P Global Mobility, a division of the more-familiar S&P Global, found that the average age of the 284 million vehicles registered in the U.S. is 12.5 years. This is music to the ears to the ears of auto parts suppliers like AutoZone, which are being tasked with keeping aging vehicles running like new.
AutoZone has also benefited from its proactive management team. In order to meet growing consumer demand, the company intends to open 200 mega hubs that can carry up to 110,000 stock keeping units (SKUs). These mega hubs are centrally located within its distribution network to ensure that its stores have easy access to parts and can easily meet consumer demand.
However, the best thing about AutoZone from an investment standpoint might be its unbeatable share repurchase program. Since initiating a share buyback program in 1998, the company’s board has authorized north of $37 billion in repurchases and completed $35.5 billion in buybacks. All told, 90% of its outstanding shares have been repurchased. This has provided a huge lift to the company’s earnings per share.
Lastly, AutoZone stock remains attractively valued. Despite a 503% increase in its share price over the trailing decade, investors can scoop up shares of this potential stock-split stock for just 19 times forward-year earnings.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Amazon and Meta Platforms. The Motley Fool has positions in and recommends Amazon, Booking Holdings, Chipotle Mexican Grill, Meta Platforms, Nvidia, S&P Global, and Walmart. The Motley Fool has a disclosure policy.
Forget Chipotle Mexican Grill: These 2 Potential Stock-Split Stocks Are Considerably Cheaper was originally published by The Motley Fool
Source: finance.yahoo.com