Chipotle Mexican Grill: Buy, Sell, or Hold?

Chipotle Mexican Grill (NYSE: CMG) has rewarded shareholders handsomely over the years. Long-term holders have seen their wealth grow nicely with market-beating returns. In the last decade, the stock gained over 423% versus a 235% return for the S&P 500 .

Clearly, the business has been operating well in the competitive restaurant industry . Can the company maintain its competitive edge and continue producing strong shareholder returns?

Image source: Getty Images.

Speedy and fresh

Chipotle offers Mexican food at affordable prices. Unlike many fast food chains, it uses fresh, higher-quality ingredients that don't have artificial flavors, colors, or preservatives. That gives it a distinct advantage over competitors like Yum Brands ' Taco Bell.

The concept continues to draw people. First-quarter revenue was up 14.1%, but this was helped by a higher number of restaurants. Same-store sales (comps) provide a better measure, since it's the change for restaurants open at least 13 months. Hence, it's an apples-to-apples comparison.

Chipotle's comps increased a strong 7%. Better still, most of the gain, 5.4 percentage points, came from higher traffic rather than increased prices. The balance came from a higher check. Management remains optimistic. It expects a mid- to high-single-digit percentage increase in comps this year.

The restaurant chain is growing its profit, too. First-quarter earnings per diluted share rose 23.9% to $13.01.

Expansion opportunities

Chipotle began humbly more than 30 years ago. It started with a single location in Denver, Colorado, and has grown to nearly 3,500 restaurants, with just 68 located internationally.

That leaves room for further domestic and international expansion. During the first three months of the year, Chipotle added 47 new restaurants. Management plans to open 285 to 315 locations this year.

Most of its new restaurants include Chipotlane, its drive-through service for digital orders. This allows customers to order via mobile devices, allowing for quicker and more convenient service. Digital sales have become a meaningful portion of Chipotle's revenue, representing 36.5% of the company's first-quarter top line.

The decision

Naturally, the company's success isn't a secret to investors, and the stock has a high valuation versus the overall market. Chipotle's shares have a price-to-earnings (P/E) ratio of 67, up from under 60 a year ago. In comparison, the S&P 500 has a P/E of 28.

It's hard to jump in when the shares sell at a high multiple. Any disappointment will likely see the shares fall sharply. But with the company filling a need for convenient, reasonably priced food with better ingredients than fast food chains, Chipotle's growth prospects remain bright.

Rather than committing a large sum at this high valuation, I'd recommend buying shares over time. You can do that via dollar-cost averaging . This requires some discipline since you're committing to investing the same dollar amount at regular intervals. However, it will smooth out your purchase prices, and you'll build up a sizable number of Chipotle shares over time.

Lawrence Rothman, CFA 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 .