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CMG - Analyst Report - Mihai and Co
CMG - Analyst Report - Mihai and Co
SELL
Target Price: $131
$349.6
$11.26
$3.78
0.47
3.30
26.09
The Valuations
Our research focused on applying a diverse range of methodologies to gauge whether the current
market valuation is realistic and sustainable.
The graph below shows the various valuation ranges from the various methodologies used. The
resulting range of share prices is very wide from $84.30 (in the case of a conservative hybrid DCF
approach) to $310.87 (in the case of the market approach using earnings multiples). Most
valuations though are below the current market value.
We decided that the most realistic valuation is the hybrid DCF approach because that shows the
intrinsic value of the company. The target price per share of $130.89 was chosen and it is based on
a more relaxed hybrid DCF approach.
$700.00
$600.00
$500.00
$400.00
$310.87
$300.00
$236.15
$184.38
$200.00
$171.53
$130.89
Beta:
0.86
52-Week Chg.
129.67%
52-Week High
$278.00
52-Week Low
$114.87
50-Day Moving Avg. $255.35
Company Overview
Chipotle Mexican Grill, Inc. operates
restaurants in 35 states throughout
the United States, Ontario, Canada
and London, UK.
The restaurants serve a focused
menu of tacos, burritos, salads and
burrito bowls, made using fresh
ingredients. The chain is focused on
trying to find the highest quality
ingredients to make great tasting
food; on recruiting and retaining top
performing people to ensure that the
restaurant experience provided is
exceptional.
The companys motto is Food With
Integrity, and of the food served
inside restaurants 100% of the
pork, 100% of the chicken, and
about 60% of the beef is naturally
raised .
$236.15
$171.53
$100.00
$84.30
$278.00
Current, $274.00
$76.25
$95.54
$114.87
$0.00
Company overview
Chipotle Mexican Grill, Inc. operates fast-casual, fresh Mexican food restaurants in the United
States, Toronto, Canada and in London, United Kingdom. As of December 31, 2010, it operated
1,084 restaurants. Chipotle Mexican Grill, Inc. was founded in 1993 and is based in Denver,
Colorado. Chipotle experienced the greatest share increase among fast casual players in 2009
appealing to consumers growing demand for fresh fast food. Chipotles philosophy is food
with integrity, meaning it sources the highest-quality ingredients that are grown or raised with
respect for the environment, animals or the people who grow them. Chipotle also believes that
food served fast does not have to be what is known as traditional fast food in America greasy,
unhealthy or low quality. Chipotle has succeeded by emphasizing freshness and customization.
All items are made to order and are cooked from raw ingredients, rather than arriving frozen at
each outlet.
Page 1 of 7
Page 2 of 7
Benchmarking
Exhibit 8 Benchmarking Against Select Competitors shows how the financial metrics of Chipotle
Mexican Grill match against the one of the comparable companies divided in the following
categories:
Quick service restaurants McDonalds, and YUM Brands
Fast casual restaurants Panera Bread and Buffalo Wild Wings
Casual dining restaurants California Pizza Kitchen, PG Changs and BJs Restaurants
In terms of profitability, Chipotle has one of the highest gross margins(higher even than
McDonalds). The only company with a higher 5 year CAGR is BJs Restaurants.
Chipotle also has the highest 5 year CAGR in net income.
The benchmarking shows that Chipotle Mexican Grill Inc. is one of the top performers in the
industry.
Page 3 of 7
Part B Valuation
The following valuation methodologies have been applied:
Discounted Cash Flow
Comparable Companies Market Multiples valuation (both based on EBITDA and
earnings multiples)
Precedent Transactions Multiples valuation (both based on EBITDA and earnings
multiples)
The results of our analysis are described in more detail in the exhibits included.
The table below summarizes the results of the valuation approaches used.
($ USD in thousands)
Equity Valuation Reconciliation
Income Approach - DCF Analysis
Market Approach - Guideline Public Companies - EBITDA Multiples
Market Approach - Guideline Public Companies - Earnings Multiples
Market Approach - Precedent Transactions - EBITDA Multiples
Market Approach - Precedent Transactions - Earnings Multiples
Current Market Cap
$
$
$
$
$
Min
2,675,362
2,419,909
3,031,938
5,443,417
7,494,199
$
$
$
Max
$4,153,889
5,851,408
$9,865,433
5,443,417
7,494,199
$8,500,000
31,735,000
Min
$
$
$
$
$
$
84.30
76.25
95.54
171.53
236.15
114.87
Max
$
$
$
$
$
$
$
130.89
184.38
310.87
171.53
236.15
278.00
274.00
Exhibit 7 Football Field Valuation Graph presents the football field valuation in a more visual
manner.
The following conclusions can be drawn from the valuations above:
It seems that the market grossly overvalues Chipotle Mexican Grill, Inc. The very high
current market capitalization of the company is mostly due to institutional buyers who see
the company as a perfect candidate for their high growth funds. But even in a high growth
scenario, where the company would need to a lot of cash to expand, the intrinsic value will
be substantially lower (less than half) of what the market price is.
The markets seem to be overvaluing the top high growth performers in the restaurant
industry (Chipotle Mexican Grill and BJs Restaurants).
Due to the bubble like valuations for the top performers, valuations for the top performers
are very high compared to the rest of the players in the industry.
The market favors the use of earnings multiples, which are prone to substantially increase
the valuations for the companies in the industry.
Page 4 of 7
Est
Est
Est
Est
Est
Est
2011
2012
2013
2014
2015
2016
EBIT
$267,662
$277,593
$280,751
$274,432
$254,780
$193,567
EBIT(1-t)
$165,147
$171,275
$173,223
$169,325
$157,199
$119,431
$80,829
$94,625
$110,699
$129,421
$151,238
$156,969
$122,981
$69,322
$80,767
$94,076
$109,626
$28,800
CAPEX
$112,095
$131,461
$154,777
$181,536
$213,909
$77,379
$10,900
$65,116
$48,378
$23,134
($15,097)
$170,220
Depreciation
FFCF
Based on:
QSR Avg
Terminal Values
Fact Casual
Casual Dining
Com parables
BJ's
$3,629,799
$4,115,292
$3,459,789
$3,695,650
$57,208
$39,838
$17,856
($10,923)
NPV
$2,575,636
$2,904,858
$2,460,349
$2,620,290
$3,938,876
Value of operations
$2,575,636
$2,904,858
$2,460,349
$2,620,290
$3,938,876
$224,838
$224,838
$224,838
$224,838
$224,838
$2,800,474
$3,129,696
$2,685,187
$2,845,128
$4,163,714
DCF
WACC
Cash
Intrinsic Enterprise Value (EV)
(-) Interest Bearing Debt
Equity Value
$10,217
$5,640,123
6.69%
($9,825)
($9,825)
($9,825)
($9,825)
($9,825)
$2,790,649
$3,119,871
$2,675,362
$2,835,303
$4,153,889
As will be later discussed in more detail, the main driver for the equity valuation using the DCF
method is the terminal value. The value per share using this method varies greatly from $84.40
to $130.89.
Exhibit 1 Net Working Capital Calculation details the calculation used to calculate the estimate
working capital balances.
The assumptions related to the DCF model are as follows:
Food, beverage and packaging costs growth rate is expected to be 4%, due to inflationary
expectations over the next 5 years. These inflationary trends can already be experienced in
the commodities markets and can increase over time, especially in the food related
commodities.
Labor cost growth rate is expected to be tame at 2% per year, due mainly to very high
unemployment rates in the US making restaurant labor available at a discounted price.
However, there are risks associated with the possibility of increases due to the company
having to increase its use of legal labor, which can lead to more labor increases.
The average occupancy cost per location is expected to be at $119,000 per year, which is
exactly the average 2009-2010.
Based on the 2006-2010 averages:
o Other operating costs are expected to be 11% of revenue
o Loss on disposal of assets is expected to be 0.4% of revenue
o G&A is expected to be 6.5% of revenue
o Depreciation and amortization is expected to be 4% of revenue
o Other Net Income is expected to be 0.07% of revenue
Exhibit 2 Revenue and CAPEX Projection details the how the revenue and CAPEX projection
was based.
Page 5 of 7
Average revenue per same store unit at the end of 2010 was $1,840,000 (as reported by the
management) and it is assumed to be growing by 3% per year from 2012 through 2015 (the
management expected it to grow in the low single digits).
Once a new location is opened, it will reach the mature location average revenue ($1,840,000
in 2010 and adjusted by 3% for subsequent years) in approximately 2 years. In the first year
of operation, the location will reach half of that target.
The number of locations is expected to continue to grow by 13% each year. The number is
reasonable one because it represents a more stable number (it went down from 23% per year
in 2006 to 13.4%).
Beginning with 2016, the company is expected to enter the stable growth mode, expanding
its number of locations by just 4% per year.
The cost for per opening a new location was $795,000 in 2010 and is expected to grow with
inflation (2% in 2011 and 4% after that, due to the loose monetary policy).
Exhibit 3 Projected Income Statement shows the projected income statement through 2016.
Discount Rate
WACC will be equal to the cost of equity (which is calculated below and equal to 6.688%), as the
only outstanding debt was paid off at the beginning of the 2011 year (as mentioned in the
financial reports). It is assumed that the company will not be taking any or will be taking an
immaterial amount of debt in the next six years. The management is very averse to borrowing
as shown by the last five years lending activity.
Beta
0.86
Rf
3.248%
Rm
4%
Re
6.688%
WACC = 6.688%
Terminal Value
The value of the business operations (based on the assumptions previously discussed) over the
5 year forecasting horizon is only $114,196,000, mostly due to the fact that during the
forecasting horizon a lot of money is being reinvested in expansion. This is why, the terminal
value is the main driver for the intrinsic value of the Chipotle Mexican Grill, Inc equity.
Exhibit 4 Terminal Value Calculation shows the details for the terminal value calculation. The
comparables used were divided into three categories, considered most similar to the business
model and industry of Chipotle Mexican Grill:
Quick Service Restaurants McDonalds and YUM Brands are the most representative
players in the category. Chipotle belongs to this category because one of its focuses is to
provide healthy food quickly.
Fast Casual Restaurants is also a category representative for the business model of
Chipotle Mexican Grill because while there is a fast food component to the way food is
delivered, there are other more upscale features such as better quality ingredients and a
Page 6 of 7
quirkier ambiance. The most representative public players and competitors are Buffalo
Wild Wings and Panera Bread Co.
Casual Dining Restaurants despite the fact that it does not provide table service,
Chipotle also meets the definition of this category. Representative companies in this
segment are: California Pizza Kitchen, P.F. Changs China Bistro and BJs Restaurants.
Based on the comparables selected the range for the terminal value can vary from $3,459,789,000
to $5,640,123,000.
The lowest terminal value will be generated when using the comparables for the
underperforming players in the casual dining restaurants segment (P.F. Changs China Bistro,
Inc. and California Pizza Kitchen, Inc.); but, this category also hold the player whose
comparables would create the highest terminal value BJs Restaurants, Inc. The latter
resembles Chipotle Mexican Grill most in all the relevant aspects: profitability, margins, growth
rate and customer base.
Page 7 of 7
Actual
Est
Est
Est
Est
Est
Est
2010
2011
2012
2013
2014
2015
2016
12.2%
$224,838
$246,528
$288,606
$337,631
$394,734
$461,275
$478,757
Accounts receivable
$5,658
$19,377
$22,684
$26,537
$31,026
$36,256
$37,630
Days AR
Inventory
$7,098
$12,733
$14,907
$17,439
$20,388
$23,825
$24,728
Days Inventory
$4,317
$4,041
$4,731
$5,535
$6,471
$7,562
$7,848
$16,016
$18,186
$21,291
$24,907
$29,120
$34,028
$23,528
$26,269
$30,753
$35,977
$42,062
$49,152
Investments
$124,766
$137,409
$160,862
$188,188
$220,015
$257,104
$266,848
$406,221
$464,544
$543,834
$636,213
$743,815
$869,203
$902,144
Accounts payable
$33,705
$58,130
$68,052
$79,612
$93,077
$108,767
$112,889
Days AP
10.5
$50,336
$149
$175
$205
$239
$280
$290
2.7%
Accrued liabilities
$38,892
$116
$136
$159
$186
$218
$226
2.1%
$-
$-
$-
$-
$-
$-
0.0%
$-
$-
$-
$-
$-
$-
0.0%
$121
-
% to revenue Cash
3.5
2.3
0.2%
$35,318
0.9%
$51,015
1.3%
% to rev. Investments
6.8%
$123,054
$58,396
$68,363
$79,976
$93,502
$109,264
$113,405
Working Capital
$283,167
$406,148
$475,470
$556,237
$650,313
$759,939
$788,739
Exhibits - Page 1 of 8
Est.
2011
Expected CPI
Investment Cost per Restaurant ($ 000s)
$
Expected # of net new locations
Total # of locations
1,084
Growth Rate
13%
Pre-opening costs per restaurant
60.21
Annual CAPEX
Pre-opening costs
Mature Location Average Revenue per Unit
Revenue from newly Opened Locations
$
Est.
2012
2%
795 $
141
1,225
13%
60.21
112,095
Est.
2013
4%
827 $
159
1,384
13%
60.21
131,461
Est.
2014
4%
860 $
180
1,564
13%
60.21
154,777
Est.
2015
4%
894 $
203
1,767
13%
60.21
181,536
Est.
2016
4%
930 $
230
1,997
13%
60.21
213,909
4%
967
80
2,077
4%
60.21
77,379
8,490
9,573
10,838
12,222
13,848
4,817
1,840
129,720
1,895
417,892
1,952
761,302
2,011
$ 1,169,174
2,071
$ 1,652,607
2,133
$ 1,732,048
$ 2,020,720
$ 2,365,621
$ 2,767,463
$ 3,235,521
$ 3,780,944
$ 3,924,235
Pre-opening costs per restaurant are based on a historical average of the pre-opening costs per restaurant for 2006-2010.
Annual CAPEX = Investment costs per restaurant (adjusted for inflation) x Expected net number of new locations
Pre-opening costs = Pre-opening costs per restaurant x Expected net number of new locations
Exhibits - Page 2 of 8
Actual
Est
Est
Est
Est
Est
Est
2010
2011
2012
2013
2014
2015
2016
Total revenue
1,835,922
2,020,720
2,365,621
2,767,463
561,107
640,972
780,390
949,471
1,154,456
1,403,029
1,514,450
Labor costs
453,573
515,284
615,298
734,214
875,558
1,043,617
1,104,832
COGS
1,014,680
1,156,256
1,395,688
1,683,685
2,030,014
2,446,646
2,619,281
Occupancy costs
128,933
145,775
164,696
186,116
210,273
237,643
247,163
202,904
222,279
260,218
304,421
355,907
415,904
431,666
Pre-opening costs
7,767
8,490
9,573
10,838
12,222
13,848
4,817
6,296
8,083
9,462
11,070
12,942
15,124
15,697
118,590
131,347
153,765
179,885
210,309
245,761
255,075
68,921
80,829
94,625
110,699
129,421
151,238
156,969
1,548,091
1,753,058
2,088,028
2,486,713
2,961,088
3,526,164
3,730,669
287,831
267,662
277,593
280,751
274,432
254,780
193,567
269,076
279,249
282,688
276,697
257,426
196,313
Net income
1,230
289,061
1,415
(110,080) $
178,981
EBITDA
1,656
(103,056) $
1,937
2,265
2,647
2,747
(98,594) $
(75,188)
172,296
174,418
170,722
158,832
121,125
348,491
372,218
391,449
403,853
406,018
350,536
2012
2013
(105,975) $
3,924,235
166,020
2011
(108,269) $
3,780,944
Assum ptions
(106,952) $
3,235,521
2014
2015
2016
4%
4%
4%
4%
4%
4%
30.5%
30.5%
30.5%
30.5%
30.5%
30.5%
2%
2%
2%
2%
2%
2%
2%
25%
25%
25%
25%
25%
25%
25%
1,084
$
119
1,225
$
119
1,384
$
119
1,564
$
119
1,767
$
119
1,997
$
119
2,077
$
119
11%
11%
11%
11%
11%
11%
11%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
G&A to Revenue %
6.5%
6.5%
6.5%
6.5%
6.5%
6.5%
6.5%
4%
4%
4%
4%
4%
4%
4%
0.07%
0.07%
0.07%
0.07%
0.07%
0.07%
0.07%
Exhibits - Page 3 of 8
170,220
3.5%
6.688%
$ 5,526,291
Comparables Avg.
$
350,536 $
$
170,220 $
10.54x
$
3,695,650 $
1.99%
BJ's
350,536
170,220
16.09x
5,640,123
3.56%
TEV/EBITDA LTM
Quick Service Restaurants
McDonald's Corp. (NYSE:MCD)
10.02x
10.69x
10.36x
9.28x
14.20x
11.74x
6.67x
6.85x
16.09x
9.87x
10.54x
Exhibits - Page 4 of 8
BvDEP ID Number
US431461763
Country
Code
US
Activity
Deal
Enterprise
value
Restaurant operator
Deal
12 months
value
Deal
Equity
value
USD
Multiples
Multiples
Multiples
Deal
Estimated
Enterprise
value
Multiples
1,337,921,000.00
1.57
1.48
1.57
1.59
EBITDA:
140,305,000.00
14.97
14.11
14.97
15.20
EBIT:
130,784,000.00
16.06
15.14
16.06
16.31
122,147,000.00
17.19
16.21
17.19
17.46
80,906,000.00
25.96
24.47 -1
25.96
26.36
Total assets:
935,456,000.00
2.24
2.12
2.24
2.28
Shareholders funds:
486,654,000.00
4.32
4.07 -2
4.32
4.38
2,032,203,591.28
1.03
0.97
1.03
1.05
1.00
Exhibits - Page 5 of 8
10 P/E
Growth
EV/EBITDA
LTM
Unit
Same Store
Margins
EPS
EBITDA
EBIT
Net
16.15x
16.94x
10.02x
15.90x
21.60x
10.69x
Average
16.03x
19.27x
10.36x
24.14x
21.94x
9.28x
25.20x
29.96x
14.20x
Average
24.67x
25.95x
11.74x
0.8%
2.1%
5.0%
2.0%
10.4%
7.2%
35.6%
21.5%
30.3%
16.3%
20.5% $
10.2% $
$
3,640,241
3,884,307
3,762,274
$
$
$
3,031,938
3,865,990
3,448,964
14.6%
5.3%
0.6%
7.9%
24.3%
30.2%
15.9%
16.5%
9.5%
12.0%
6.3% $
7.3% $
$
3,370,675
5,162,923
4,266,799
$
$
$
3,926,843
5,362,271
4,644,557
-2.4% N/A
2.3%
17.7%
5.6%
70.8%
9.0%
11.4%
11.7%
3.2%
5.2%
6.1%
-0.1% $
3.8% $
4.5% $
$
2,419,909
2,485,479
5,851,408
3,585,599
N/A
$
4,562,226
$
9,865,433
$
7,213,829
20.5% $
7.5% $
-0.1% $
5,851,408
3,830,706
2,419,909
$
$
$
35.24x
N/A
6.67x
22.87x
25.49x
6.85x
36.89x
55.12x
16.09x
Average
31.67x
40.31x
9.87x
36.89x
25.20x
15.90x
55.12x
28.51x
16.94x
16.09x
10.54x
6.67x
14.6%
4.9%
0.0%
7.9%
3.0%
-2.4%
70.8%
26.8%
7.2%
35.6%
17.4%
9.0%
30.3%
11.8%
3.2%
25.39x
41.15x
21.00x
13.49%
9.40%
42.80%
19.8%
16.0%
High
Average
Low
0.0%
1.6%
9.8%
9,865,433
5,102,450
3,031,938
9.7%
CMG Metrics
Interest Bearing Debt
EBITDA (EOY 2010)
Earnings (EOY 2010)
$ 9,825
$ 364,278
$ 178,981
Exhibits - Page 6 of 8
$600.00
$500.00
$400.00
$310.87
$300.00
$236.15
$184.38
$200.00
$171.53
$130.89
$236.15
$171.53
$100.00
$84.30
$278.00
Current, $274.00
$76.25
$95.54
$114.87
$0.00
Exhibits - Page 7 of 8
Best
MCD
Avg
Fast Casual
Worst
Best
PNRA
BWLD
Avg
Casual Dining
Worst
Best
CPKI
BJRI
Avg
Margin Analysis
Gross Margin %
EBITDA Margin %
EBITA Margin %
EBIT Margin %
Marketing %
Net Working Capital %
Depreciation & Amort %
25.6%
19.0%
14.0%
13.8%
36.7%
31.8%
26.5%
26.5%
31.1%
25.4%
20.3%
20.2%
33.5%
15.2%
10.3%
10.2%
25.6%
14.3%
8.7%
8.6%
29.6%
14.8%
9.5%
9.4%
18.8%
10.3%
4.5%
4.5%
19.2%
10.0%
5.0%
5.0%
18.7%
10.4%
4.9%
4.9%
5.2%
-5.3%
0.0%
3.4%
3.7%
0.0%
4.3%
-0.8%
0.0%
1.3%
5.5%
5.1%
3.3%
10.6%
5.7%
2.3%
8.1%
5.4%
1.0%
-12.9%
5.8%
0.8%
7.6%
5.0%
0.8%
-3.0%
5.5%
5.3%
9.3%
9.2%
6.1%
16.5%
18.2%
5.7%
12.9%
13.7%
26.9%
21.6%
21.6%
27.0%
40.5%
40.5%
27.0%
31.1%
31.1%
12.4%
-1.5%
-1.5%
28.6%
27.0%
27.0%
19.2%
11.1%
11.8%
5 Years CAGR
Total Revenue
Earnings from Cont. Ops.
Net Income
CHIPOTLE
Gross Margin %
EBITDA Margin %
EBITA Margin %
EBIT Margin %
Marketing %
Net Working Capital %
Depreciation & Amort %
37.7%
19.8%
16.0%
16.0%
1.4%
10.6%
3.8%
5 Years CAGR
Total Revenue
Earnings from Cont. Ops.
Net Income
23.9%
36.6%
36.6%
Exhibits - Page 8 of 8