California-based company Chipotle’s shares have rallied to record levels over the past year powered by strong earnings report owing to solid demand for burritos and rice bowls among its relatively wealthier customer base.

Chipotle Mexican Grill shares rise

A stock split lowers the price of shares without affecting the company’s valuation, making them more affordable for individual investors.

Based on Tuesday’s closing price of $2,797.56, the company’s stock would trade at around $56 after the split. Chipotle has around 27.4 million shares outstanding.

Chipotle stock split

If the chipotle stock split is approved at the upcoming annual meeting on June 6, its shareholders will receive an additional 49 shares for each share held.

The chipotle stock split, the first in its 30-year history, “will make our stock more accessible to employees as well as a broader range of investors,” said Chipotle’s Chief Financial and Administrative Officer Jack Hartung on Tuesday.

“They’re also trying to do what Walmart has done in the sense that they want to give employees more economic ownership,” said Thomas Hayes, chairman at hedge fund Great Hill Capital.

Walmart stock split

Retail giant Walmart a 3-for-1 share split that went into effect beginning February 26, making the shares more affordable to its employees, who have the option of buying the stock through payroll deductions.

Ease liquidity for Chipotle

“Chipotle’s stock split should ease liquidity in the stock given how high the share price has risen over the past years. Otherwise, the economics of the business remain just as compelling,” said Jim Sanderson, an analyst with Northcoast Research.

The fast-casual Mexican chain went public in January 2006 at $22 per share.

Chipotle’s P/E ratio

Its forward price-to-earnings multiple (P/E), a common benchmark for valuing stocks, is 49.72, higher than industry peers including Starbucks SBUX.O and McDonald’s MCD.N that have a P/E ratio of 20.89 and 22.24 respectively.

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Activist investor Bill Ackman exposed in 1^st week September 2016, that he has become Chipotle’s second-largest investor. On the 6^th of September, Ackman’s hedge fund Pershing Square Capital Management revealed a 9.9% stake in Chipotle. Since this declaration, Chipotle shares have surged by 5.6%. Ackman ardently believes the popular nonchalant chain is underrated and has a colossal development opportunity ahead.

After almost a year of being in crisis mode, it seems activist investor Bill Ackman and Chipotle’s prospects of recovery will congregate. In addition, Ackman will engage in discussions about Chipotle’s authority and board composition, business operations, cost constitution, management and more aspects of the company.

Current Share Market Scenario

In the present scenario, Pershing Square’s investment is valued at over $1 billion, assembling it amongst Ackman’s top holdings. This stake revelation is also activist investor Bill Ackman’s earliest major investment since Valeant Pharmaceuticals scandal.

Market shareholders are probably covering positions, giving the Chipotle shares a temporary shot. Nonetheless Chipotle shares continue to be a volatile stock. In addition to, while months have passed since the past scandal, fundamentals still counter harsh headwinds that set off hopes for a recovery in 2017 in doubt.

Until Chipotle starts expanding like-for-like store sales and earnings, the stock that gets more than 51 times forward earnings seems unreasonably expensive.

Analyst Predictions

Factually, Paul Westra, an analyst at Stifel, recommends shareholders to get away with the stock and attributes the present share hike’s irrational assumptions. He proclaims that he fails to fathom Pershing shareholdings investment theory. Additionally, this is not the first time that Barron’s has mulled over bearishly on Chipotle shares. In December 2015, in the midst of its scandals, Westra counseled readers that when it comes to this stock, it pays to be chicken. Since then, the shares lost 17.5% of their value. The stock gave up 42% of its value when Chipotle’s share price topped $758 in August 2015. For now, that drop seems to be worthy of. Nonetheless, there is little evidence to diners up roaring for one of Chipotle’s legendary burritos, especially not like it used to be in the olden days.

However, there are other analysts that predict a positive future too. Maxim Group analyst Stephen Anderson claims profit margins to expect rising headwinds in future. This analysis is coming from confidence on promotional activities for higher food-safety conformity costs. Additionally, Anderson believes that higher wages can be a driving factor. Approximately a quarter of the chain’s restaurants will observe authorized wage hikes. In addition, the menu price will raise by 1.5%. However, with administration still struggling to gain back customer confidence, now may not be a favorable time to hike prices.

Currently, analysts reviewed by Thomson Reuters counter profit growth to pick up next year. They forecast per-share revenue of $10.41 compared to $3.87 this year.

The Verdict

Ackman’s quest to change the future scenario will be an interesting observation. Pershing Square fund has itself incurred huge losses this year. It still claims that Chipotle is undervalued. Additionally, it remarks the chain as a strong brand with varied offering, vast growth opportunity, and imaginative leadership. However, beyond declaring that it plans to take part in the company’s strategic plans after the not-so soaring progress rate since a while now. Henceforth, activist investor Bill Ackman has backed his decision with correctives measures for the food chain. Future beholds to reveal if this will prove a wise step.

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