What Happened: Shares of mexican fast-food chain Chipotle (NYSE:CMG) jumped 7.8% in the morning session after the company announced a 50-for-one stock split.
Stock splits often result in a positive market reaction, as they are initiated when a stock's per share price is considered too high to be accessible. When a stock's price is too high -- for example, CMG breached $3,000 per share recently -- some investors (mostly retail investors or employees of the company with smaller amounts of assets to invest) can find it hard to justify buying, as they will end up owning only a fraction of the shares.
Following the stock split, every existing share of Chipotle's common stock will automatically convert into fifty shares. For instance, if you owned one share priced at $2500, after the split, you would own 50 shares priced at $50 each, maintaining the total value of your investment at $2,500.
As a reminder, a stock split does not change anything about the company's fundamentals. It does not actually make the stock cheaper either. We at StockStory--as well as the professional investing public--look at cheapness or expensiveness not based on price per share alone but based on a stock's price compared to its future earnings or free cash flow potential. With this announcement, CMG's operations and therefore its financial profile, will be unchanged. After the initial pop the shares cooled down to $2,911, up 4.2% from previous close.
Is now the time to buy Chipotle? Find out by reading the original article on StockStory.
What is the market telling us: Chipotle's shares are not very volatile than the market average and over the last year have had only 3 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was about one month ago, when the stock gained 8.4% on the news that the company reported fourth-quarter results with revenue, same-store sales, and EPS exceeding analysts' estimates. The company's outperformance was driven by strong year-on-year unit growth of 7.4%. It also got a pricing tailwind of 1.0% and opened more restaurants in the quarter than expected (121 vs estimates of 117).
A highlight of Chipotle's 2023 was that it formed its first international partnership with franchisee Alshaya Group in the Middle East. Should the company lean into franchising more going forward, financial performance could improve since the franchise model generally yields higher-margin royalty revenue and requires less capital investments.
Looking ahead, Chipotle expects same-store sales growth in the mid-single digits for 2024, along with 300 new store openings. Overall, this was a fantastic quarter that should have shareholders cheering.
Chipotle is up 29.7% since the beginning of the year. Investors who bought $1,000 worth of Chipotle's shares 5 years ago would now be looking at an investment worth $4,372.
