Insider buying activity can be a valuable metric for investors looking to follow the “smart money” with their investing capital. When key decision-makers - including company officers, directors, and shareholders of 10% or more - choose to buy company stock with their own money, it typically means they think the stock price is going higher.
Since these well-placed company insiders presumably have a greater insight into operational challenges, strategies, and financials, their vote of confidence in the stock can carry considerable weight. That said, here's a closer look at one stock that just scored an insider buy for the first time in over a year, with the purchase valued around $2 million.
About Chipotle Mexican Grill
Founded more than three decades ago in 1993, and subsequently spun off by McDonald's (MCD) in 2006, Chipotle Mexican Grill (CMG) operates a chain of fast-casual restaurants specializing in Mexican food such as burritos, bowls, tacos, and salads, which are customizable assembly-line style at the customer's request. Chipotle has an impressive restaurant footprint, with over 3,200 locations as of March 31. These restaurants are spread across the U.S., UK, France, Germany and Canada.
With a market cap of $63.3 billion, Chipotle stock is up an impressive 64.6% in 2023, outperforming the broad market by a substantial margin.
Director Buys $2M in the Company Stock
On Dec. 15, Chipotle board member Gregg L. Engles bought 877 shares of the company at an average price of $2,284.81 per share, for a total investment of just over $2 million. It's the first insider buy for CMG all year - since the last time Engles bought stock in May 2022, in fact.
During the course of 2022, Engles was the only CMG insider to buy stock, with two transactions in March and May totaling 450 shares at an average price at $1,296.16. In other words, the stock is up about 76% from the last time Engles made a significant investment in Chipotle - and now he's buying even more shares.
Engles currently serves as the founder and managing partner of Capitol Peak Partners, but is also a longtime veteran of the food and beverage industry. He previously served as CEO of both Dean Foods and WhiteWave Foods, the latter of which is now a division of Danone S.A. (DANOY).
Inside CMG's Financial Performance
Over the past 10 quarters, Chipotle's earnings have shown consistent year-over-year growth. Overall, revenue and EPS at CMG have expanded at a 10-year CAGR of 12% and 14.24%, respectively.
In the latest quarter, Chipotle's earnings rose by 19.4% from the previous year to $11.36 per share, comfortably outpacing the consensus estimate of $10.55. The company's EPS has topped Wall Street's expectations in 4 out of the past 5 quarters.
Driven by new restaurant openings and a 5% increase in comparable restaurant sales, total revenue for the quarter rose by 11.3% from the prior year to $2.5 billion, which was right in line with expectations.
Despite opening 62 new restaurants in 54 locations in the third quarter, Chipotle's liquidity position improved from the beginning of the year. The company closed the quarter with a cash balance of $602.3 million, compared to $384 million at the beginning of the year.
Analysts are forecasting EPS growth of 15.8% and 34.35% for the current quarter and FY 2023, respectively. Meanwhile, forward revenue growth is pegged at 13.82%, considerably above the sector median of 5.48%.
Strategic Growth and Operational Challenges
Backed by its strong earnings growth, Chipotle remains well poised to expand its presence sustainably. The company remains on track to meet its long-term target of growing its store count to 7,000 in North America alone. Moreover, in July, Chipotle inked its first-ever franchise agreement to operate in the Middle East next year, with plans for two locations each in Dubai and Kuwait. The company also outlined plans for its European operations, including moves to align its training tools, systems and culinary with its U.S. operations, as well as building brand awareness.
CMG does face some operational challenges, but the company has provided some reasonable visibility into the expected impact. The eventual rise in minimum hourly pay for fast-food workers in California is expected to have a limited affect on the company's financials, as the state accounts for only 15% of the company's store count. This is anticipated to have a labor-cost impact of just 2.5-3% on a company-wide basis.
Company management has also addressed the issue of weight-loss drugs, which some analysts have warned could impact demand. CEO Brian Niccol indicated no material impact, and added that for users of treatments like Wegovy, “it's important the calories they do consume are coming from clean food. And that's what we provide… so we're still well-positioned even for those that decide to use the drug.”
What Do Analysts Expect for CMG?
Analysts are upbeat, with an average rating of “Moderate Buy” for Chipotle stock. Although the mean target price of $2,215.85 represents a discount to the current share price, the Street-high target price of $2,525 implies an upside potential of 10.4% from current levels.
Out of 29 analysts covering the stock, 18 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, and 9 have a “Hold” rating.
