Chipotle (CMG) Stays Premium Despite 25% Stock Plunge

Business Insider

6 hours ago

Chipotle Mexican Grill (CMG) shares have tumbled over 25% since its disappointing second-quarter results were published on July 23rd, sending the stock to 52-week lows. The company missed revenue and same-store sales expectations, squeezing profit margins. Yet despite the bruised sentiment and deepening decline, the stock still trades at a relatively premium valuation.
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While Chipotle maintains strong brand recognition and its position as a category leader presents some appeal for long-term investment, I am Neutral on the stock and prefer to hold off until I see more unmistakable evidence of sustained recovery.
Big Burritos Mean Big Business
Chipotle has established a dominant position in fast-casual dining. Its model is based on serving customizable Mexican-inspired meals such as burritos, bowls, tacos, and salads. It was an early adopter in the fast-casual space of providing responsibly sourced ingredients that resonate with health-conscious consumers (and who tend to be more willing to pay premium prices).
The restaurant chain enjoys a strong brand reputation and a dedicated customer base. It has steadily expanded its market share in the rapidly growing Limited Service Restaurants sector from 22% to 30% over the last ten years.
Most recently, Chipotle is pursuing expansion efforts by opening 61 new restaurants during the most recent quarter, with 47 of these featuring the new drive-thru 'Chipotlanes' format. For the year, management projects 315 to 345 new company-owned restaurant openings, with over 80% having a Chipotlane.
Recent Financial Performance Lacks Spice
Chipotle's Q2 FY2025 results were mixed. The company reported revenue of $3.1 billion, a modest 3% year-over-year increase but falling short of analyst expectations. Somewhat concerning was the 4% decline in comparable restaurant sales, a key metric that reflects weakening consumer demand across existing locations.
Profitability took a hit, with the operating margin dropping to 18.2% from 19.7% the prior year, due in part to rising ingredient and labor costs. Yet, earnings per share (EPS) of $0.33 were in line with Wall Street estimates (though it marked a 3% year-over-year decline). In fact, last month's quarterly figures were the 9th consecutive earnings beat in a row, according to TipRanks data.
Management has given guidance to expect flat sales for the remainder of 2025 due to ongoing macroeconomic pressures and a challenging operating environment.
Rich Valuation with Negative Momentum
Chipotle trades at a significant premium to its peers, with a P/E ratio of 37x compared to McDonald's at 25x and the broader restaurant sector average of 15.81x. This premium likely reflects the company's historically strong growth profile, with a return on equity of 43% far exceeding the typical restaurant industry range of 15-30%.
However, the company's relatively rich valuation leaves little room for disappointment. The stock currently demonstrates negative price momentum, bearishly trading below major moving averages. Further revenue slippage due to its exposure to consumer spending pressures and cost inflation could continue to depress investor sentiment.
Is Chipotle a Good Stock to Buy?
Despite the recent stock decline, analyst sentiment toward Chipotle remains cautiously optimistic. The stock is rated a Moderate Buy, with 20 Buy and seven Hold recommendations. CMG's average 12-month stock price target of $59.36 represents a potential upside of almost 40%.
Most recently, Morgan Stanley's Brian Harbour reiterated a bullish stance on the stock, with a $60 price target. He noted concerns about short-term demand fluctuations, but believes that these trends may be temporary and that Chipotle remains a benchmark for growth restaurants.
Meanwhile, Bank of America's Sara Senatore and Truist's Jake Bartlett have both lowered their price targets on the stock. Senatore maintains a tentative Buy rating, while Bank of America has removed CMG from its 'US 1 List' of best ideas. Similarly, Bartlett has kept a Buy rating on the shares, while lowering the price target from $64 to $60, noting Q2's same-store sales miss and Chipotle's sensitivity to macro factors. However, he believes that recent pricing and an improved guest experience should drive a recovery.
The Last Bite on Chipotle Mexican Grill
Chipotle is a high-quality fast-casual restaurant operator with reasonable fundamentals and clear long-term growth drivers. Its market leadership, ongoing innovation, and expansion opportunities position it well for long-term growth.
Yet, current macroeconomic challenges and the stock's premium valuation warrant a cautious approach. Near-term volatility is likely to continue until the company can show that it can sustain improving sales and profit margins.
I remain Neutral on the stock, given its elevated valuation multiple and ongoing uncertainties, and prefer to wait for more substantial evidence of recovery before establishing a position.