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Chipotle Mexican Grill (NYSE:CMG) announced its first-ever stock split this week, causing a stir. But this isn’t any old stock split. This is one of the largest in market history, splitting each stock into 50 pieces. It’s been a long time. Chipotle stock has been trading at a four-digit price tag for about four years, rising about 175% in that time and nearly tripling in price.
Let’s take a look at why Chipotle is splitting its stock and whether the stock is a buy right now.
What is achieved by stock split
Stock splits are often carried out in public companies when stock prices have skyrocketed, but stock splits do not change anything essential about the stock or the company. Just divide the same size pie into more smaller pieces.
Chipotle said it decided to split its stock to make it easier to buy, which is the usual reason. “We believe this will make our stock more accessible to a broader range of investors, not just our employees,” said Chief Financial Officer Jack Hartung. These days, most investors can invest in high-priced stocks by buying fractional shares, but a four-digit price tag can seem scary. It may also be ineligible for individual investors or institutional investors who require specific criteria.
One reason investors are interested in split-stock stocks is because they typically indicate a company is doing well enough to cause its stock price to skyrocket to a high price. Investors had a lot of confidence in stock split stocks even before the stock split was announced, and that is likely to continue. Hartung continued: “This separation comes at a time when our share price is at an all-time high, driven by record revenues, profits and growth.”
High-profile stock splits that have occurred over the past few years include: apple and Amazonand walmart It was also announced recently.
Forget about stock splits.Chipotle is a great company
Stock splits in and of themselves are not a great reason to buy stocks. It’s important to evaluate a company’s fundamentals and not rely on stock splits to determine whether a stock is worth buying. As Hartung pointed out, Chipotle has had incredible performance leading to record sales and profits. Moreover, many companies are doing this at a time when they are feeling tremendous pressure.
Revenues in 2023 increased 14.3% year-over-year to $9.9 billion, driven by a 7.9% increase in comparable sales. Operating margin expanded from 13.4% in 2022 to 15.8% in 2023, and earnings per share (EPS) increased 38.4% to $44.34.
But can Chipotle sustain that? It certainly seems so. It virtually invented (and perfected) the fast-casual restaurant model, gaining a loyal following of people who love fresh, mid-priced food. It has a wealthy customer base that is resilient during tough times and generates higher volumes of sales during good times.
The company opened 271 new restaurants in 2023 and operated more than 3,400 restaurants as of the end of last year. But the company sees opportunity in its 7,000 restaurants in North America. Chipotle’s presence is fairly saturated in U.S. urban markets, but the company is opening new stores in the suburbs and overseas, particularly in Canada. The company recently signed its first franchise agreement with a Middle Eastern operator and opened stores in Dubai and Kuwait.
Should I buy before the stock split?
There is some data supporting the theory that stocks increase in value immediately after a stock split, suggesting that it may make sense to buy before the split. But it’s often a short-term momentum that doesn’t last long. Over the long term, stock split stocks gain value through performance and opportunity.
It doesn’t matter when you buy Chipotle stock, as long as you value Chipotle’s solid model and prospects. It has consistently outperformed the market over its lifetime and is likely to continue to do so.
Should you invest $1,000 in Chipotle Mexican Grill right now?
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John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Jennifer Cybill has no position in any stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Chipotle Mexican Grill, and Walmart. The Motley Fool has a disclosure policy.
Chipotle stock split: Should you buy this giant restaurant chain now?Originally published by The Motley Fool
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