Chipotle Mexican Grill completed its 50-for-1 split. What is the outlook for the company's stock?

On 19 March 2024, Chipotle Mexican Grill (NYSE: CMG) announced a 50-for-1 stock split scheduled for 25 June, one of the largest stock splits in NYSE history. Investors favoured this decision, with the stock price rising since 19 March, hitting new all-time highs. As scheduled, Chipotle successfully completed its split on 25 June, with the question now arising of how this will change the value of its shares. This article will analyse the company's financial position, list its main competitors whose shares have undergone similar procedures, and conduct a technical analysis of Chipotle Mexican Grill stock.

About Chipotle Mexican Grill

Chipotle Mexican Grill was founded in 1993 by Steve Ells. The idea was to create a fast-food restaurant using fresh ingredients and classic cooking techniques without compromising quality. This strategy resonated with consumers, quickly making the brand popular. By 1998, Chipotle had expanded to 16 restaurants, catching the attention of McDonald's Corp (NYSE: MCD), which invested in the company and became its co-owner. By 2005, McDonald's had invested 360 million USD, allowing Chipotle to expand to over 500 restaurants. In 2006, McDonald's sold its stake in Chipotle, making the company independent. The same year, Chipotle had a successful initial public offering, raising over 170 million USD. Based on the Q1 2024 results, the company expanded its chain to 3,479 restaurants.

Chipotle Mexican Grill's competitors

Chipotle Mexican Grill's main competitors listed on US stock exchanges include the following companies:

1. McDonald's Corp (NYSE: MCD) – operates a global chain of fast-food restaurants under a single corporate concept. It offers a diverse menu of burgers, sandwiches, drinks, and other products. The chain operates through owned and franchised restaurants
2. Restaurant Brands International (NYSE: QSR) – an international corporation specialising in operating and developing fast-food restaurant chains. It owns brands such as Burger King, Tim Horton, and Popeyes Louisiana Kitchen
3. Yum! Brands, Inc. (NYSE: YUM) – a global corporation that owns and operates several large international chains of fast-food restaurants. It owns brands such as KFC, Taco Bell, and Pizza Hut

Of the companies listed above, only McDonald's Corp and Yum! Brands have split their shares. We will, therefore, study the price behaviour after a stock split using these companies as examples.

McDonald's Corp stock split

Since the IPO date (21 April 1965), McDonald's has had nine stock splits, the first on 14 June 1971 at a three-for-two ratio. Considering all the splits, one McDonald's share bought before 14 June 1971 is equivalent to holding 121.5 shares.

Below are the dates of the splits and the time that the price needed to surpass a pre-split high:

1. 14.06.1971 3:2 (a new high was reached in two months)
2. 06.06.1972 2:1 (a new high was reached in five months)
3. 07.10.1982 3:2 (a new high was reached in five months)
4. 25.09.1984 3:2 (a new high was reached in five months)
5. 26.06.1986 3:2 (a new high was reached in nine months)
6. 23.06.1987 3:2 (a new high was reached in two years)
7. 19.06.1989 2:1 (a new high was reached in three months)
8. 27.06.1994 2:1 (a new high was reached in eight months)
9. 08.03.1999 2:1 (a new high was reached in seven years and seven months)

As the above information shows, the stock price typically corrected after a split, with the correction lasting no longer than nine months. However, in cases when a split was followed by a crisis in the US stock market (Black Monday in 1987 and the dot-com bubble in 2000), the correction could take years.

Yum! Brands, Inc. stock split

TRICON Global Restaurants, Inc. (presently Yum! Brands, Inc.) went public on the NYSE on 17 September 1997. Since then, Yum! Brands has had two stock splits, the first on 18 June 2002 at a two-for-one ratio and the second on 27 June 2007 at a two-for-one ratio. As of 2024, one YUM share acquired before 18 June 2002 equals four shares.

Below are the dates of the splits and the time that the price needed to surpass a pre-split high:

1. 18.06.2002 2:1 (a new high was reached in fifteen months)
2. 27.06.2007 2:1 (a new high was reached in three months)

According to the above information, Yum! Brands shares also underwent a correction following the split. To summarise, the stocks of both companies showed a correction after the splits.

In July 2024, Yum! Brands shares are trading 600% above their pre-split high, while McDonald's stock trades 900% above the high recorded before the last split. In other words, both companies saw significantly higher stock prices in 2024 than those on the dates of the last splits. This means that positive returns are highly likely if investing in these stocks for the long term.

Chipotle Mexican Grill's Q1 2024 financial performance

Chipotle Mexican Grill released its Q1 2024 financial results on 24 April 2024. Below is the report data compared to the corresponding period in 2023.

• Revenue – 2.7 billion USD (+14.1%)
• Earnings per share – 13.37 USD (+24.9%)
• Net earnings – 359.3 million USD (+18.9%)
• Average restaurant sales – 3.08 million USD (+7.0%)
• Operating margin – 27.5% (+7.0%)

47 new restaurants were opened in Q1 2024, boosting revenue and sales. Online sales accounted for 36.5% of total revenue.

During the reporting period, Chipotle Mexican Grill repurchased 25.0 million USD worth of shares at an average share price of 2,320 USD. As of 31 March 2024, the company had 399.1 million USD available and may use it to repurchase shares.

In its 2024 forecast, Chipotle expects mid-to-high single-digit growth in comparable sales and plans to open from 285 to 315 new restaurants.

Technical analysis and forecast for Chipotle Mexican Grill stock

Chipotle Mexican Grill stock has traded within an ascending channel from 26 October 2023 to 26 June 2024. The trendline was breached on 27 June, indicating the potential completion of the uptrend and the beginning of a deeper correction. Chipotle Mexican Grill's stock forecast for 5 July 2024 suggests that the price could test the 65.00 USD resistance level, rebound, and fall to the 56.70 support level. If the price rebounds from this level, the uptrend may resume, with the share value reaching a new all-time high of 69.00 USD.

Risks of investing in Chipotle Mexican Grill

Chipotle's stock price has skyrocketed by more than 260% since 2020. The number of restaurants increased by 30%, and 2023 revenue rose from 5.98 billion to 9.87 billion USD. Operating margin increased from 17.6% to 27.5%. Fundamental analysis of Chipotle Mexican Grill points to the company's overall rapid and solid growth.

Chipotle's stock is trading at a forward P/E ratio of 45, indicating it is valued 45 times higher than the projected future earnings due to a surge in the stock price. For comparison, McDonald's forward P/E is 18 and that of Yum! Brands stands at 20.

Chipotle shares are vulnerable in this situation. If the company fails to meet forecasts or loses its current profitability, investors may lock in profits, leading to a sharp decline in the stock price. Therefore, all eyes will be on the Q2 report scheduled for 24 July 2024.

Chipotle Mexican Grill's stock outlook

Investors often favour stock splits, and the stock price tends to rise after the stock split announcement, as was the case with Chipotle's shares after 19 March. However, as other companies' history shows, the stock typically undergoes a correction after a split. The forward P/E ratio suggests that the shares are overbought compared to the competitors. Technical analysis of Chipotle Mexican Grill also signals a potential price decline. In the near term, Chipotle Mexican Grill's shares will highly likely correct, with a possible subsequent long-term price rise to new all-time highs.