Today, I want to talk about the recent rapid rise in CMG stock. To get there, let me share some anecdotal evidence as to why Chipotle just keeps thriving...
I live in a historic seaside town, where the downtown is populated by sit-down seafood restaurants and seeing Redcoats and Patriots toasting craft beers after their day of Revolutionary War reenactments isn’t unusual. “Big news” in town is when a mega-yacht docks here on its way to a ritzier destination, like Bar Harbor or Martha’s Vineyard. People walk down to the waterfront for a look – if the weather’s nice – and hope its billionaire owner doesn’t draw more attention to our little corner of the world.
On the edge of town, just off the interstate, are a couple of strip malls, where locals tick errands off quickly, and, for highway travelers, a gas station, a McDonald’s, a Wendy’s and two Dunkin’ Donuts – this is Massachusetts, after all.
This spring, coming off the highway, I saw a line of three dozen or so cars stretching out of a parking lot and down the main street into town. It’s been a good while since I moved here from New York City, where you grow concerned if there isn’t a line, so this struck me as quite unusual. It was opening day at Chipotle Mexican Grill, the fast casual Tex-Mex restaurant. The line was populated by locals. People were excited.
I probably don’t need to catch you up on the basics of Chipotle Mexican Grill (CMG). It serves a focused menu of wraps and bowls of beef, chicken, pork and vegetables, made to order. The chain went public in 2006 and there are 2,800 locations, mostly in the U.S., so odds are you’ve seen one.
That’s part of what struck me about the line: The novelty should have long worn off, yet a store opening continues to draw throngs of people. Chipotle’s popularity isn’t just in my town – it’s everywhere. The company is growing at double digits – sales should rise more than 20% this year, to $7.5 billion. CMG stock is a rarity outside of the tech and pharma sectors these days – a fast-growing large cap that continues to have a clear path to growth for years to come.
Why CMG Stock is an ESG Play
I’m chief analyst of Cabot’s brand new Sector Xpress Greentech Advisor, in which we usually focus on fast-growing stocks in the three main arms of the ESG (environmental, social, and governance) mega-trend: carbon reduction, like energy efficiency artificial intelligence; carbon zero, including wind and solar energy advances; and carbon negative, like CO2 capture and sequestration businesses. I consider sustainability the fourth arm of Greentech, of which food is a significant part.
Overall, U.S. food sales – groceries and restaurants– have been growing at a 1.3% clip in recent years. Sustainable food sales are growing almost four times as fast at 5%, while organic food is growing even faster at more than 6% annually, according to the USDA. That’s a signal sustainable food is a significant, growing trend. There’s a reason Jeff Bezos and Amazon bought Whole Foods in 2017.
Like Tesla has proven EVs have a market, Chipotle has been doing the same for sustainable fast food. The company focuses on using ethically farmed livestock, including chickens with outdoor access, pasture-raised beef and organic and transitional vegetables, sourcing them locally as needed. The company does use conventionally farmed meat and vegetables as needed to maintain adequate supplies, but generally does a good job of sourcing food from humanely treated animals. It’s been five years since the chain had serious food safety issues, thanks to a revamp of the way the business and its growers manage and track vegetables, the source of previous problems.
While consumer demand for sustainable and organic food has been wind in Chipotle’s sails, management has been innovating in ways that are like adding a couple of high-powered motors to the sailboat. In particular, during the pandemic the company executed a flawless pivot to digitally generated orders while stores were closed to walk-ins. Digital orders are now more than half the business, compared to less than 20% in 2019, with customers mainly ordering on a phone app and picking up completed orders in the store. A sizeable (around 25%) of digital orders are deliveries, which are probably the least profitable part of the business, given commissions paid to delivery services. With the economy reopened, indications are that Chipotle is retaining the better part of customer digital habits – ordering remotely, then picking up – while successfully raising delivery prices to regain the margin it loses in those sales.
The company also rolled out a loyalty program in 2019 that should help customer retention and boost sales through data mining. It is also putting drive-through pick-up lanes in new locations, something it largely hadn’t done before now. Average annual location sales should soon hit $3 million, up from $2.1 million last year, as the rise in digital orders has locations shifting to twin food assembly lines, doubling capacity without raising the wait for physical customers or requiring much capital spending.
Management is also moving into fertile territory such as ghost kitchens – locations where the food sold is prepared elsewhere – and digital-only stores (no walk-in ordering) which should allow it to expand into smaller, profitable niche markets like college campuses. The key to all this is tasty food, which Chipotle continues to have, at least according to my palate. It pleased my kids and plenty of other customers by finally adding quesadillas to its offerings this past year. They were long the most-requested item Chipotle locations didn’t have.
Buy Chipotle Stock Now
Greentech Advisor subscribers and I bought CMG stock in July, so we’re already sitting on a nice profit. But there should be continued strong growth ahead. Management expects to add 200 stores this year, a rate that’s probably sustainable for a long time – Starbucks, McDonald’s and Burger King all have multiples more total stores than Chipotle. Sales could top $9.5 billion in 2023 with earnings per share of more than $40 thanks to expansion and improving same-store sales, driven by digital.
Chipotle’s latest earnings wowed Wall Street and convinced investors the momentum is for real. Shares are up 22% since mid-July.
If you want to know what other ESG stocks I’m currently recommending, click here.
Do you own Chipotle stock in your portfolio? When did you buy it, and how has it performed for you?