Chipotle Mexican Grill (CMG 0.40%) has been an investor favorite since the onset of the pandemic. Management did an excellent job adjusting quickly to restaurant restrictions and developing a robust digital ordering business.
Online sales for delivery and pickup fueled growth for the fast-casual restaurant. However, enthusiasm from investors has sent the stock to elevated levels. Let's look closer and determine if Chipotle is too expensive for 2022.
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Chipotle is gaining momentum
In the nine months ended Sept. 30, 2021, Chipotle's revenue grew by 27.3% from the same period in 2020. Economic reopening gained momentum in 2021, and Chipotle recaptured sales from people dining in person. Meanwhile, digital sales remained robust, and the two boosted revenue growth.
Said Brian Niccol, chairman and CEO of Chipotle, during the third-quarter 2021 call:
Chipotle's third-quarter results demonstrate strong momentum in our business, fueled by a multipronged strategy and a passionate team that's delighted to welcome more guests back into our restaurants. Our team has proven their ability to be resilient and successfully execute against macro complexities. As a result, I believe we are better positioned to drive sustainable long-term growth than ever before, which makes me excited about what we can accomplish in the years ahead.
Responding to continued customer enthusiasm for the brand, Chipotle opened 41 new locations in its third quarter ended Sept. 30. That brings the total to 2,893. In the long run, management believes there is room for it to grow to over 6,000 restaurants in North America alone.
There is a good reason for optimism. Average restaurant sales have grown for four consecutive quarters since Q4 2020, increasing from $2.2 million to $2.55 million. The growth in average restaurant sales was during a period when it opened 182 new restaurants.
Moreover, Chipotle has proven adept at generating profits. In the last decade, earnings per share have increased at a compounded annual rate of 8.3%. Management has conservatively handled the balance sheet, which is now pristine, with $1.2 billion in cash and equivalents and no debt. It's no surprise that Chipotle's stock has delivered exceptional returns to investors.
Chipotle's excellent prospects may already be priced into the stock
Interestingly, Chipotle's rising stock price can be justified by improving operating performance. Increases in earnings and free cash flow drove Chipotle's valuation lower throughout 2021 and so far in 2022.
Chipotle is trading at a price-to-free cash flow ratio of 81.49 and a price-to-earnings ratio of 58.65. Both are significantly lower than the highs it was selling for earlier in 2021. Looking at these two metrics and comparing them to Chipotle's historical ranges for the last three years, the stock does not appear to be expensive.
However, when looking at the same two metrics mentioned above and comparing Chipotle to a small group of its peers, the stock does look expensive. Chipotle sells at a price to free cash flow that is more than double that of McDonald's, Starbucks, and Domino's Pizza, as evidenced in this chart.
Restaurant valuation metrics. Data By YCharts.
Overall, assessing both its historical valuation metrics and comparing to peers, Chipotle does appear expensive. That does not mean the stock won't go higher from here; it very well could. However, it likely means stock price growth could be more dependent on improving operating performance.
