It's been a tough past month-and-a-half for Chipotle Mexican Grill (NYSE: CMG) shareholders. Although the stock's up since the company reported solid second-quarter numbers a little over a week ago, it's also still down 22% from its mid-June peak.
Rather than worrying about whether or not Chipotle stock's already made its ultimate low, investors might instead want to use what's left of this dip as a buying opportunity. It's a discount that Chipotle shares don't offer very often, or for very long.
Second thoughts on Chipotle Mexican Grill
On the off-chance you're not familiar with it, Chipotle Mexican Grill is a Tex-Mex eatery. Its best-known for custom-made burritos and salad "bowls" that are not only delicious, but wrapped up and easy to eat. It's technically fast food, but it's also far from being just-another hamburger joint . It competes with outfits like Moe's and Qdoba, but with 3,530 stores Chipotle is by far the biggest name in the premium burrito business.
This size offers a clear competitive advantage. It doesn't, however, mean Chipotle stock is immune to any and all setbacks. Case in point: Shares were flying high through the first half of this year. Then reality set in. Investors finally began to realize June's stock split didn't actually bolster the overall bullish argument; they were still paying a steep premium for Chipotle stock.
Investors also began to fear the company's Q2 earnings numbers slated for release in late July could expose how the restaurant chain was trapped between rising ingredient costs and complaints of smaller portion sizes.
Although Chipotle shares bounced in response to that report, they're still down 22% from their June peak. As it turns out, the company's voicing concern that profit margins could remain crimped at least through the quarter currently underway if not through the end of the year.
On balance, though, the market's seeing Chipotle's glass as less than half-empty when it's actually more than half-full.
Actually, all the right tailwinds are blowing
Don't misread the message. The restaurant chain's got much to figure out, like figuring out how to keep cash-strapped consumers coming back in spite of a tough economic backdrop. Shares are uncomfortably expensive in the meantime.
Take a step back and look at the bigger picture, though. Chipotle's still doing lots of things right to justify much of its rich valuation -- and drawing customers into its restaurants is one of those things. Even in this challenging economic environment, the company's Q2 same-store sales improved 11.1% year over year, driving companywide revenue growth of 18.2% thanks to 52 new locales. New menu items and training aimed at increasing customer throughput clearly made a positive impact.
CMG Revenue (Quarterly) data by YCharts
The Tex-Mex eatery's profit margins may be stronger going forward than suggested as well. Last quarter's operating margin actually rolled in at 19.7%, up from 17.2% in the comparable quarter last year, with food and packaging costs (as a percentage of sales) holding steady year over year. Profits improved from $0.25 per share in the second quarter of 2023 to $0.33 per share this time around.
In both of these veins, Chipotle's ever-rising costs of doing business -- payroll and food, mostly -- are finally abating if not outright falling. After inching higher again in the latter half of last year and early this year, the United States' food commodity prices have been falling since April's multi-month peak. The nation's employment-cost index is leveling off as well.
US Producer Price Index: Foods data by YCharts
These two factors, of course, bode well for the overall economy at a time when the Federal Reserve says an interest rate cut is on the radar. This will also help Chipotle's premium fast-food business. So, connect the dots. The market may be underestimating what's actually in store for Chipotle, while the company itself is arguably understating its potential.
The stock's rich valuation actually isn't a problem
But the stock's steep valuation? It's a legitimate concern. Investors should always weigh the relative (to earnings) price of any stock before diving in.
It's only part of a much broader stock-picking regimen, however, and not a particularly important part in light of how little it helps predicts a stock's performance. Indeed, Chipotle shares have historically been priced at frothy levels, and it's never been a long-term problem for the stock. It's regularly rallied in spite of its historically rich valuation, in fact.
CMG data by YCharts
This might help make the point: Even with this stock's enormous run-up from its mid-2022 low, analysts are still calling for more gains. The current consensus price target of $64.16 is nearly 20% above the stock's present price. And more than half of these analysts also rate Chipotle stock as a strong buy. Assuming they've remained level-headed and thought their calls through, that's certainly a good sign, too.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy .
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