When a stock price declines meaningfully, it's a good time for investors to assess the company's prospects. After all, the market is typically pretty efficient , and it might be sending you a signal.
Chipotle Mexican Grill (NYSE: CMG) is one such stock that should get a good look from investors today. After reaching an all-time high of nearly $69 in July, the shares have dropped more than 14%. However, this pullback could be a good buying opportunity since the company still has strong growth prospects .
Here's why you should strongly consider purchasing Chipotle's shares.
Image source: Getty Images.
Attractive business
Chipotle offers Mexican food at affordable prices. It's generally considered part of the fast-casual segment, not fast food. Unlike fast-food chains like Yum! Brands ' Taco Bell, Chipotle offers higher-quality food that doesn't have artificial colors, artificial flavors, or preservatives.
The food quality, convenience, and price have attracted people to its restaurants. You can see this based on its growth. After starting with a single location in the early 1990s, it now has over 3,500.
Fortunately, the concept continues drawing customers. Its second-quarter same-store sales (comps) increased 11.1%, and management expects a mid- to high single-digit percentage gain for the year. The operating margin expanded by 2.5 percentage points to 19.7%, and adjusted diluted earnings per share grew 36% to $0.34.
Impressively, while some of Chipotle's comps increase came from higher prices, most of it was attributable to increased traffic. A higher number of transactions accounted for 8.7 percentage points of the comps gain. That's important, since price increases have limits. People have grown weary and balked at higher prices at other food-related companies like PepsiCo and McDonald's . The higher traffic indicates that people still find Chipotle a desirable place to dine.
Expansion plans
With the concept in place and consumer acceptance, Chipotle still has room for expansion. In the second quarter, it opened (net of closures) 51 new locations, and 42 the previous period. It now has 3,530 restaurants. But there's room for more.
Management plans to open a total of 285 to 315 restaurants this year. Most of the new locations will have a Chipotlane, or a drive-thru window that incorporates mobile app and website ordering.
That allows customers more convenient access and speedier service. Management also notes that it improves the company's sales and profit margin. Digital sales accounted for 35.3% of Chipotle's second-quarter sales.
Better valuation
It's hard to call Chipotle's shares a bargain based on valuation metrics like the price-to-earnings (P/E) ratio. The stock has a P/E ratio of 57. But the multiple has fallen from over 70 a few months ago, and has a 10-year median of 64. For comparison purposes, the S&P 500 has a P/E of 30.
Chipotle continues to expand locations, grow sales, and increase profitability. That seems to warrant a higher multiple amid expectations for continued growth. But if the high P/E ratio makes you hesitate, you don't have to make a large financial commitment all at once.
You can buy the shares using dollar-cost averaging . It takes some discipline, but you can invest fixed dollar amounts at regular intervals (like $1,000 every three months). That way, you purchase more shares when the stock drops and fewer when it rises. After a period of time, you'll own a fair number of shares in this still-growing, profitable company.
And now could be a good time to get started with Chipotle shares down from their all-time high.
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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 recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy .
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