Chipotle: Buy, Sell, or Hold?

Chipotle Mexican Grill (NYSE: CMG) has seen some pretty smooth sailing these past few years coming out of the pandemic. This has been the case until recently when the company received a jolt when its CEO surprisingly decided to jump ship to Starbucks .

Let's look at three things to consider when evaluating the stock and whether it is ultimately a buy, sell, or hold.

Its former CEO is gone but not forgotten

Former CEO Brian Niccol did a lot of good things at Chipotle. After taking the helm at the Mexican fast-casual chain in 2018, he helped the company rebound from the food-borne illness issues the restaurant was dealing with before he joined.

In addition to making sure the company was not hit with anymore customers getting sick, he was also responsible for helping bring customers back to Chipotle restaurants in the wake of these incidents. Niccol helped achieve this through better marketing, menu innovations, and improved technology.

Before he joined, Chipotle tried to woo customers back through buy one, get one free offers. Niccol greatly shifted the company's marketing strategy away from expensive promotions and more toward brand building through social media and television.

At the same time, Niccol began to lean heavily into technology. This included with the company's app, digital ordering, and loyalty program. On the digital side, he also made sure it was beneficial to the customer experience, reconfiguring restaurants to allow customers who ordered digitally to skip the line and pick up their orders on a grab-and-go shelf. He later introduced Chipotlanes so customers didn't even have to leave their cars.

With its loyalty program tied to its app, Chipotle was also able to gather data on their customers and help find ways to better serve them and get them to order more often. He also introduced technology to make restaurants even more efficient preparing orders as well as for managing labor.

Niccol also helped drive product innovation, although he didn't push too far into this area, as one of the beauties of Chipotle's model is its simple menu and limited numbers of ingredients. This gives the company buying power while importantly allowing for quick throughput given the restaurant's assembly-line approach. However, his introduction of limited-time offerings (LTOs) has been a hit and has helped drive excitement and sales.

Now while Niccol is gone, his impact on the company is not. All the heavy lifting has been done, and all the technological and menu innovations as well as marketing strategies he's employed remain behind. As such, his impact on the company will endure after he leaves and set the company up for the future.

Image source: Getty Images.

Growth drivers are still in place

Just as importantly, the growth drivers for Chipotle will not change with a new CEO.

Expansion is still its biggest growth opportunity ahead. The company currently has just over 3,500 store locations. By comparison, McDonald's has about 13,500 locations in the U.S., so Chipotle should have plenty of room to continue to grow. Chipotle is still seeing solid, high-single-digit new-location growth, with plans to open 285 to 315 new restaurants this year.

Meanwhile, Chipotle has barely scratched the surface when it comes to international markets. It currently has well under 100 locations outside of the U.S., and most of those are in neighboring Canada. This year it entered its first new market in over 10 years when it opened a location in Kuwait in partnership with franchise owner Alshaya Group.

Overall, Chipotle still has a long runway of expansion opportunities in front of it, both in the U.S. and abroad.

In addition to expansion, Chipotle still has levers to grow same-store sales . The company has shown tremendous pricing power over the years, typically taking between 2% to 3% price increases a year. However, more recently, it has been able to take even more while still seeing traffic increase.

Expect the company to continue to innovate on the product side to get customers excited. Dessert is one area the company has tested in the past but has yet to make a full commitment to for its menu. This could be a future growth driver if it can find the right options.

Expanding into breakfast offerings, meanwhile, could be a huge growth driver. This has been a tried-and-true strategy for many companies in the quick-service restaurant space over the years and is something Chipotle still has in its back pocket to drive meaningful growth.

Its valuation has become more attractive

While Chipotle's stock is not in the bargain bin by any stretch, its valuation has come down following the surprise announcement of Niccol's departure. It trades at a forward price-to-earnings (P/E) r atio of 42 times, which is below the more-than 50 times multiple it traded at earlier this summer.

CMG PE Ratio (Forward 1y) data by YCharts.

Given that its long-term growth prospects have not changed, I would take advantage of the discount and be a buyer of Chipotle stock at current levels. It still has decades of solid expansion in front of it, as well as a number of other growth levers that can be pulled.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy .