Is Chipotle a once-in-a-generation investment opportunity ahead of a 1:50 stock split?

When financial results for the fourth quarter of 2023 were announced about two months ago, Chipotle Mexican Grill (NYSE: CMG) announced financial results that slightly exceeded Wall Street's expectations. Recently, however, shareholders are excited about new developments.

On March 19, the Tex-Mex restaurant chain announced a massive 1:50 stock split. Since then, stock prices have risen about 4% (as of 4/2), and this year they have risen 27%. Currently, investor interest in this stock is clearly strong, and the momentum is growing even more.

Shareholders are scheduled to vote on the stock split at the annual general meeting in June. Pending approval, will Chipotle be a once-in-a-generation investment opportunity?

Cut the burrito into small pieces

First, it's important to understand exactly what a stock split is. Normally, if a company's stock price is strong, as is the case with Chipotle, the price rises to a very high level. Management wanted to lower prices and announced a stock split. Since there is no need to buy fractional shares like some securities companies, and more total shares can be acquired, lower nominal stock prices may be attractive to small investors.

If this is approved, all shareholders will receive 49 new shares for each Chipotle share they already own. As a result, 50 times the issued shares will be traded at 1/50 of the price.

But at the end of the day, Chipotle doesn't change anything at a fundamental level. The stock split will not change management's strategy or alter the trajectory of earnings or profits.

Should I buy Chipotle stocks?

Now that the details of Chipotle's stock split have been clarified, let's now focus on the question of whether the stock would be a smart purchase opportunity at this time. There are a few key factors you need to consider.

There is no doubt that the company continues to burn with every cylinder. Chipotle reported sales and earnings per share growth of 14.3% and 38.4% respectively in 2023. The numbers for these two headlines are a huge increase compared to just five years ago. Chipotle's results have maintained strong financial results despite continuing macroeconomic uncertainty.

Naturally, the key to the company's strategy is to proactively open new restaurants. Currently, the number of Chipotle stores is 3,437 (as of December 31, 2023), an increase of 250 stores compared to 12 months ago. The success of the drive-thru facility known as Chiporane is remarkable. Management points out that these locations will increase sales, profits, and profits for new restaurants. These will also help strengthen Chipotle's digital presence.

Over the long term, management believes there is a possibility that there will be 7,000 stores in North America, which is approximately double the current store area. Annual sales for these restaurants are expected to reach $4 million from $3 million in the fourth quarter. Such predictions will certainly make bullish shareholders very happy.

However, investors need to be aware that just because a company has performed amazingly and has bright growth prospects, it is not necessarily possible to buy its shares without hesitation. Valuation is a missing element that needs close scrutiny.

After the stock price surged 311% in the past 5 years, Chipotle's stock price is now extremely expensive. The price-earnings ratio is trading at an astonishing level of 65.5 times. Despite great fundamentals and high store opening goals, valuation is in nosebleed territory. Chipotle is currently being priced for perfection, so there's literally no margin of safety for future investors.

The fact that there will be a large stock split of 1 to 50 will definitely attract investors' attention. But that doesn't mean Chipotle is a once-in-a-generation investment opportunity. Investors shouldn't buy stocks right away. Rather, you should wait for a significant setback before considering adding that business to your portfolio.

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