Chipotle Mexican Grill (CMG)

AIM Presentation January 30, 2012 Adam Wiklund, CFA

Agenda
Thesis/recommendation Company overview Industry overview Valuation Risks Summary/recommendation

CEO & Founder Steve Ells

Thesis/Recommendation
A great company that has experienced phenomenal growth, but the fundamentals cant support this price An overpriced stock in an already overvalued industry

Current price
o $365

Target price
o $212 o Short 28 shares of CMG ($10,220)

Estimated return
o 42%

Sources: Bloomberg

Company Overview
Quick Facts
Definition
o

Mission Statement
"Food With Integrity" isn't a marketing slogan. It's not a product line of natural and organic foods. And it's not a corporate initiative that will ever be finished or set aside to make room for other priorities. It's a philosophy that we can always do better in terms of the food we buy. And when we say better, we mean better in every sense of the word- better tasting, coming from better sources, better for the environment, better for the animals, and better for the farmers who raise the animals and grow the produce.

Founded IPO
o
o o

A fast casual dining establishment that specializes in burritos and tacos July 13, 1993

Founder

January 26, 2006

Steve Ells (current Chairman and CoCEO) Denver, Colorado 1,131

Headquarters
o o o

Number of Locations Number of Employees

26,500

Sources: Company data

Whats on the menu?

Method of consumption Substance
o o o o o o o o o o o o o Burrito/Burrito Bowl o Tacos (Crispy or soft) o Salad Chicken Steak Barbacoa Carnitas Vegetarian Rice Beans Dairy Salsa Guacamole Chips Drinks

Extras

Operational Simplicity

Labor
o 2 work shifts per day o 8 people working per shift

Limited menu
o 137 SKUs (Competitors around 1,000 SKUs)

Substantial growth with limited innovation

o Burrito bowl and salad are the only new menu items Only required 2 extra items o New ordering methods Fax/online/phone apps
Sources: Company data and JPMorgan

Flexible Format
Target market
o Suburban and urban areas with at least15,000 residents o 18-49 age bracket o Daytime population of at least 10,000 o Median household income above national average o o o o o 212 free-standing 663 end-cap 174 in-line 35 other (includes malls) 1084 in total

Units (at end of 2010)

A model

o Secondary trade areas o Lower investment and occupancy costs o Smaller size

Sources: Company data

Industry Overview
Projected sales in US foodservice industry:
o $600 billion

Industry Segments
o

Trends
o o o o

Fast food Sandwich Pizza Chicken Full service Casual dining Family restaurants Coffee/snack Other International expansion (EM) Health focus Preference towards value and quality Additional items/meals

Sources: Standard & Poors and Nations Restaurant News

Industry Growth
Restaurant Industry Consensus EPS Growth Estimates

Sources: Standard & Poors, FactSet, Barclays Capital, and company reports

Overvalued Industry
Relative NTM P/E multiple vs. the S&P 500 Restaurants appear expensive relative to market

Sources: Goldman Sachs and FactSet

Restaurant Industry Forward P/E Valuation

Sources: FactSet and Barclays Capital

Restaurant Industry Forward P/E Valuation

Sources: FactSet and Barclays Capital

Industry/Valuation

Sources: Standard & Poors, National Restaurant Associations 2010 Restaurant Industry Operations Report

Discounted Free Cash Flow

Discounted Free Cash Flow

DCF Equity Value WACC Calculation

Same-store Sales

Sources: Company data and Goldman Sachs Research estimates

SSS for Chipotle

Sources: Company data and Goldman Sachs Research estimates

Total Units
Goldman believes CMG is only at 30% of potential penetration A Model Lots of competitors
o o o o o o Baja Fresh Qdoba Pancheros Moes Taco Bell Taco Johns

Sources: Company data, Goldman Sachs Research estimates, and Fortune Magazine

Food, beverage and packaging costs

Sources: Company data and Goldman Sachs Research estimates, Bloomberg, USDA, and BLS

Food, beverage and packaging costs (% of sales) - Chipotle

Sources: Company data and Goldman Sachs Research estimates

Sensitivity Analysis

Earnings Surprise

Sources: Company data and Bloomberg

What are options pricing in?

Sources: Bloomberg

Overvalued or Undervalued?

Key Risks
What will cause the stock to continue to rise?
o o o o o Successful international expansion ShopHouse expansion Economic rebound Decrease in commodity prices Increase in real estate developments
SSS deceleration Poor economy/economic slowdown Higher commodity prices (food inflation) Higher wages/labor costs Earlier than expected market saturation

What will cause the stock to reverse?

o o o o o

Highlights
Whats wrong with the company?
o Very little! Chipotle has developed a winning formula with its process and menu and has grown into a very strong company that will see a bright future

Whats wrong with the stock?

o CMG is worth $212/share but trading at $360/share o Overvalued/expensive industry relative to S&P 1500

What explains the difference?

o The market is pricing in Aggressive growth in units (and their appropriate size) Optimistic food price trajectory Sensitive earnings expectations

Recommendation
o Short 28 shares of CMG

Supplemental Materials

Sources: Standard & Poors and Company data

Company
History/background
o o o o What they do Where they are # of employees Etc.

Sources: U.S. Department of Commerce: Census Bureau

Sources: Company data and Goldman Sachs Research estimates

Sources: U.S. Bureau of Economic Analysis, USDA Economic Research Service, and Standard & Poors

Same-store Sales

Sources: Company data and Goldman Sachs Research estimates