Why a 50-for-1 Stock Split Is Not Game Changing for Chipotle Stock
Investors are cheering Chipotle Mexican Grill's (NYSE: CMG) stock following the announcement of its 50-for-1 stock split. The stock rose 4% in the following trading session, a possible sign of further interest in the stock.
However, the likelihood of this split fundamentally helping Chipotle shareholders is low due to the actual effects of such a move. Instead, investors should look to the core business factors that drove Chipotle higher over the last 18 years rather than this latest milestone.
Chipotle and the stock split
Admittedly, the stock split sounds impressive on the surface. The fact that it plans this split in the first place is a testament to the fast-casual restaurant chain's long-term growth. Nonetheless, stock splits do not change the value of your position. If you own 100 shares of Chipotle, it may feel rewarding to see that turn into 5,000 shares. Still, the total value of your holdings will remain the same.
Where the stock split may help is it likely improves Chipotle in the eyes of small investors. With the stock at $58 per share instead of $2,900, small investors may feel they can better afford whole shares, increasing the likelihood they would invest in the stock.
Liquidity is another issue. While the average volume of about 220,000 shares per day makes the stock relatively liquid, not splitting the shares would eventually lower average share volume to the point that it becomes more challenging to buy or sell the stock at the prevailing price.
The case for Chipotle
However, even if such factors help Chipotle's stock, its real catalyst is the business itself. It has built a successful formula offering low-cost Mexican cuisine made with healthy ingredients at low prices. Despite the need to periodically raise those prices amid rising food and labor costs, its business continues to grow.
In 2023, its revenue grew 14% over the prior year to $9.9 billion. This included comparable restaurant sales growth of 8%. During that time, the company also added 271 locations, bringing its total restaurant count to 3,437 as of the end of 2023.
Those increases helped take its yearly profit to more than $1.2 billion, rising 37% from the net income of $899 million reported in 2022. Amid those improvements, the stock has risen 80% over the last year.
Admittedly, that increase may have taken the stock price ahead of the company's growth. Its P/E ratio now stands at 65. While Chipotle's earnings multiple rarely falls below 50, such a P/E ratio makes it expensive despite the company's impressive earnings growth.
Still, investors should not count Chipotle out before or after the stock split. The company plans between 285 and 315 store openings in 2024. Moreover, it believes it can grow to 7,000 locations in North America. Considering that this does not include Europe, where it currently operates 25 locations, its expansion will likely continue for years into the future.
Making sense of Chipotle stock
Chipotle probably remains a buy for investors, but not because of the stock split. Indeed, the stock split announcement puts Chipotle back in the news and generates short-term excitement.
Nonetheless, the split will not directly add to shareholder returns. What will help investors is for the company to continue executing well and staying the course with its expansion. Such successes have taken the P/E ratio to an elevated level, and prospective investors may want to consider buying shares more cautiously for that reason.
However, Chipotle has a proven formula for success and plenty of room to expand in the U.S. and internationally. Such conditions will serve Chipotle well regardless of its nominal stock price.
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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.
Why a 50-for-1 Stock Split Is Not Game Changing for Chipotle Stock was originally published by The Motley Fool
