Chipotle Stock gets cheaper, but not necessarily cheaper.

Chipotle Mexican Grill (NYSE:CMG) stock provides investors with a real-life lesson about the difference between a “lower price” and a “actually low price.” Ultimately, while stock splits may make it easier to fit assets into your portfolio, they don’t automatically make stocks cheaper.

Still, with Chipotle stock up 5% to 6% in pre-market trading today, short-term traders are clearly excited, regardless of whether the stock is cheap or not. Perhaps this is a sign of the times, as some investors see all news as good news, even if the valuation is less than ideal.

Split CMG stock into large sized pieces

Let’s start with the must-know facts. Chipotle’s board of directors just approved a 1-for-50 split of the company’s common stock.

“This is the first stock split in Chipotle’s 30-year history,” noted Jack Hartung, Chipotle’s chief financial and administrative officer.

It’s really surprising to think that it took so long for Chipotle to split its stock. CMG stock has been trading above $1,000 per share since the summer of 2020 and is currently near $3,000 per share.

Nonetheless, I think it’s better late than never. Of course, the rationale for a stock split is to make the stock cheaper and more attractive to investors. As Hartung said, the stock split “will make our shares more accessible to employees and a broader range of investors.”

The stock split isn’t official yet, as it still needs shareholder approval at Chipotle’s annual meeting scheduled for June 6. But considering the stock’s 6% surge this morning, it seems certain Chipotle’s shareholders will approve the split. divided

Now is a good time to clear a few things up. First of all, the split means shareholders will receive 49 additional shares instead of 50 for each share they own. If all goes as planned, the shares will be distributed after the market closes on June 25 and CMG stock will be trading post-market. -Based on splits on the next day.

Second, stock splits generally don’t make the stock better or worse. Imagine cutting a burrito into small pieces. You’re still eating the same amount of burritos, and the ingredients in those burritos haven’t changed.

Today’s stock traders may be excited because Chipotle stock could soon rise as more investors seek access to cheaper prices. On the other hand, by the time you read this, the market excitement will have already been reflected in CMG stock.

In fact, the market excitement has been reflected in stocks for some time. Over the past four years, Chipotle’s stock price has skyrocketed from $500 to nearly $3,000. Moreover, Chipotle’s 12-month GAAP price-to-earnings (P/E) ratio was around 63 even before today’s stock price rise.

Burritos are selling like hotcakes

If you haven’t noticed, fast food has become quite expensive over the past year or two. You might think that high food prices would reduce Chipotle’s customer traffic, but the company’s fourth quarter fiscal 2023 data proves otherwise.

As a result, the company’s comparable restaurant sales increased 8.4% year over year, compared to Wall Street’s calls for 7.1% growth. Chipotle also opened 121 new restaurants in the fourth quarter. The goal, according to CEO Brian Niccol, is to reach “7,000 restaurants in North America.”

Clearly, Chipotle’s customers want to eat burritos, regardless of price. The proof is in Chipotle’s quarterly revenue of $2.5 billion, up 15.4% year-over-year, in line with analysts’ consensus estimates. Chipotle also reported quarterly earnings of $10.21 per share, up 27.3% from a year ago and ahead of Wall Street expectations of $9.71 per share.

Chipotle mentioned the “benefits of increasing menu prices” in its press release, but customers certainly won’t see the price increases as a “benefit.” But if people are willing to pay more for burritos, obviously raising prices will continue to help the company’s sales and bottom line.

With this in mind, Chipotle’s P/E ratio may be a little easier to understand. Still, value-starved investors may want to look elsewhere at Chipotle’s sales and earnings growth, which, while impressive, probably doesn’t justify the surprising stock rally that has occurred since the COVID-19 pandemic lows.

So even if CMG stock soon splits into more digestible pieces, its valuation may be too hot and spicy for some value-conscious investors.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.