Image source: The Motley Fool.
Continue Reading Below
What a difference a year makes. Last year the biggest question regarding Chipotle Mexican Grill's (NYSE: CMG) stock was when a possible stock split might occur. If you follow their history, it's not hard to understand why: After pricing its IPO at $22 per share in 2006, shares increased as high as $750 per share in 2015, giving investors an annualized return of approximately 50%. Here's a chart of Chipotle's incredible growth throughout the last decade:
Recent struggles have tempered calls for the stock split somewhat. The company has stumbled over the last year as continued fallout from its food-safety scandal has weighed on stock prices. For an example of pre-food scandal Chipotle versus post-scandal Chipotle, look no further than the company's restaurant comparable sales before and after fiscal Q3 2015:
Still, shares of Chipotle currently exchange hands for approximately $415 per share, the sixth-highest 'per-share priced" company in the entire S&P 500. Should Chipotle still consider a stock split?
Splits are generally a one-time boost to share prices
Stock splits typically do result in a one-time increase in prices. The theory is by lowering the share price, and keeping all other factors equal, it allows more investors to buy shares. The additional liquidity results in an upward lift to split-adjusted prices. Additionally, short term traders pile in companies that announce stock splits, giving the stock a further boost.
The average three-month volume (shares traded) tends to support the thesis that lower share prices increase liquidity. The ten highest-priced S&P 500 stocks average a three-month volume of approximately 1 million shares per day while the ten lowest price shares average trading volumes of 17.1 million shares per day.
Data source: Yahoo Finance.
However, in the long run, share splits are a one-off event and do not add long-term value to the company. A good example of this is Netflix. After announcing a 7-for-1 stock split and watching shares jump to nearly $700, shares of the company currently trade hands at $97.50, trailing the greater stock market, albeit slightly, post-split:
Ignore stock splits, focus on this
In the long run, the company's operational performance is the main driver for future stock returns. And right now the biggest concern about Chipotle has nothing to do with competitor strength. Instead, the biggest concern investors should worry about is the loss of trust in the company's ability to provide safe food.
These concerns are particularly brand damaging to Chipotle due to the company's stated value proposition of "Food with integrity." Chipotle attracted the GMO-eschewing, ingredient-sensitive diner that is likely to be harder to win over than the average consumer.
Chipotle has wisely engaged in a few "win-back" campaigns like the recently announced "Kids Eat Free on Sundays," giving college students free sodas, and its Chiptopia Summer Rewards campaign. While it's a smart move to convince skeptical former customers, there's no guarantee the company will win back many of these consumers and, in the short term, these freebies will weigh on margins.
As far as company analysis goes, it's a rather simple story. The company needs to win back customers and comparable sales is the best metric to determine its success at doing so. Investors should focus more on operational and reputational improvement and less on if the company will split its stock.
A secret billion-dollar stock opportunity The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.
Jamal Carnette has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.