financial profitability
Selina Watkins
chipotle.pdf
Initial Valuation Report
Chipotle Mexican Grill, Inc.
12/14/2015
Final Report
CONTENT
Executive Summary ......................................................................................................................................................................... 1
Company and Industry Overview ............................................................................................................................................. 2
Chipotle Mexican Grill - The Business .................................................................................................................................... 2
Strategic Highlights ........................................................................................................................................................................ 2
Restaurant Industry - The Playing Field ............................................................................................................................... 2
Financial Ratio Analysis ................................................................................................................................................................ 4
Key Ratios across Industry .......................................................................................................................................................... 4
DuPont Analysis ............................................................................................................................................................................... 5
Profitability across Industry ....................................................................................................................................................... 6
Detailed Revenue Analysis .......................................................................................................................................................... 7
Other Key Ratios .............................................................................................................................................................................. 8
Forecast of Financial Statements ............................................................................................................................................. 9
Financial Statements – 2015-2020 .......................................................................................................................................... 9
Sustainable long term growth rate analysis ..................................................................................................................... 10
Underlying assumptions ........................................................................................................................................................... 10
Risk and Return Analysis .......................................................................................................................................................... 12
Overview Risk/Return Analysis ............................................................................................................................................. 12
Portfolio Simulation .................................................................................................................................................................... 13
Calculation of Beta ....................................................................................................................................................................... 14
Required Returns based on Capital Asset Pricing Model [CAPM] .......................................................................... 15
Preliminary Recommendations ............................................................................................................................................. 15
Corporate Valuation ..................................................................................................................................................................... 16
Discounted Cash Flow Model .................................................................................................................................................. 16
Residual Income Model ............................................................................................................................................................. 17
Comparable Valuation ................................................................................................................................................................ 18
Final Recommendation .............................................................................................................................................................. 19
Appendix ............................................................................................................................................................................................. 20
Calculation Financial Ratios .................................................................................................................................................... 20
Executive Summary
- 1 -
Chipotle Mexican Grill, Inc.
STRONG BRAND WITH CONTINUOUS GROWTH
Over the last 3 years, Chipotle experienced a strong growth
period reflected by top line growth rates of up to 28% (FY2014)
and EBITDA growth rates of up to 30% (FY2014). This growth
was driven by menu price increases as well as organic restaurant
expansions. In addition, Chipotle’s brand has been strengthened
continuously with a focus on fresh ingredients and a sustainable
and transparent supply chain management. Based on this strong
brand development, Chipotle has manifested itself in its unique
position combining high margins as seen in the fast food industry
with a high quality casual dining experience. However, recent e-
coli cases across several restaurants resulted in a significant
drawback in Q4/2015 resulting in a price drop of -23.8% in the
last 3 months. Nevertheless, we still see a continuous growth
potential for the next 3-years period, in particular with
expansion opportunities in Europe and Canada as well as
increasing enhancement of the new restaurant concepts,
ShopHouse Southeast Asian Kitchen and Pizzeria Locale.
FINANCIAL HIGHLIGHTS
Chipotle’s financials support the strategic focus that has been the
center of the business. This success is manifested throughout the
financial statements, which indicate a strong growth momentum
from top to bottom line. Even though these developments were
driven by high over proportional rise of marketing costs, the
profit margins could slightly increase. Comparable Sales rose up
to 16.8% in 2014, the highest value in the industry. A high P/E
ratio compared to its competitors underlines the market
perception of continuous growth and investment opportunities.
CHIPOTLES COMPETITIVE FINANCIAL POSITION
The profitable positioning in between the fast food and the casual
dining industry is reflected in several financial ratios. Stable
EBITDA-Margins of around 20% are comparable to Starbucks’ or
Dominos’ margins, while a high inventory turnover close to 200x
underlines the strategic brand position with fresh and high
quality ingredients similar to Wendy’s business model. In
addition, the negative cash conversion cycle highlights Chipotle’s
good relations to its suppliers, which is key, given the importance
of a stable supplier network as basis for expansion.
Share Price Development
Key Financials
Analyst Team Earl Hall
Spencer Hayles
Patrick Herrmann
Abigail Munguia
Benjamin Whitesell
Balance Sheet, Income & Cash Flow Statement
(in $m) 2012 2013 2014
Cash 473 578 758
Current Assets 547 666 878
Net PPE 867 963 1107
Total Liabilities 423 471 534
Total Equity 1246 1538 2012
Retained Earnings 949 1277 1722 Total Assets 1669 2009 2546
Revenue 2731 3215 4108
COGS 1991 2360 2991
Operating Expenses 279 315 400
EBITDA 545 636 828
EBITDA Margin (%) 20.0 19.8 20.2
D&A 84 96 110
Net Income 278 327 445 Profit Margin (%) 10 10 11
Operating Cashflow 420 529 682
Net change in Cash -79 1 96 Free Cash Flow 223 329 429
Growth Rates
(in %) 2013 2014
Revenue 18% 28%
COGS 19% 27%
Operating Expenses 13% 27%
EBITDA 17% 30%
Net Income 18% 36%
Net PPE 11% 15%
Total Liabilities 11% 13%
Total Equity 23% 31% Retained Earnings 34% 35%
Key Ratios
(Avg. Sales in $m) 2012 2013 2014
ROE 24.3 23.5 25.1
Diluted EPS 29.4 19.7 35.0
P/E 50.1x 44.8x 56.6x
Avg. Sales / Restaurant 1.9 2.0 2.3
Avg. Sales / Employees 0.07 0.07 0.08
Comp. Sales 7.1% 5.6% 16.8%
Fixed Asset Turnover 3.2x 3.3x 3.7x Cash Conversion -6.1 -4.9 -3.5
$350
$400
$450
$500
$550
$600
$650
$700
$750
$800
Strong Buy Target Price: $647.6
Upside Potential: 7.3% - 25.9%
Company and Industry Overview
- 2 -
CHIPOTLE MEXICAN GRILL – THE BUSINESS
Chipotle Mexican Grill, Inc. opened its first restaurant in Denver, Colorado on July 13, 1993.1 Their
corporate office is located in Denver Colorado where their first restaurant was opened. Chipotle has a
focused menu that offers tacos, burritos, burrito bowls, and salads.2 However, although they only offer a
selected amount of products Chipotle management explains that given the various ways customers can
create their product, this provides them with a variety of choices. In addition to the Chipotle Mexican Grill
restaurants they also own ShopHouse Southeast Asian Kitchen and Pizzeria Locale. As of December 31,
2014 they owned 1,783 restaurants total, of which 1,755 were Chipotle Mexican Grill establishments, and
they had 53,090 employees.3 Chipotle has implemented what they call “Food with Integrity”, which means
that they only use ingredients that are made in accordance to safe animal practice and crops that are
grown in awareness off the environment. The standards that the company has in place makes it difficult
for them to find suppliers that meet their requirements and hence makes their suppliers a very important
part of their business. Given the higher cost incurred with producing these ingredients, Chipotle has
higher cost for their supplies and ingredients used to produce their products. However, Chipotle has seen
benefits in maintaining their standards regardless of the increased cost associated with them. These
standards have garnered Chipotle with customer loyalty, which is highly sought after in the restaurant
industry.
Figure 1 - Revenue Split by Geography Figure 2 - Shareholder Analysis
STRATEGIC HIGHLIGHTS
2015 Strategic goals for Chipotle center around “thoughtful growth of the Chipotle brand”. This includes
a location expansion of 190 to 205 additional Chipotle locations through their broadened development
activity, which now incorporates “smaller or more economically mixed communities, highway sites, outlet
centers, and military bases.” Additionally, this involves a continued expansion in marketing toward
development of “owned media” and production of branded content as a means of demonstrating
Chipotle’s “food with integrity” philosophy. Given this emphasis on growth of the Chipotle brand, CMG is
focused on maintaining its current adaptations of the Chipotle philosophy to other food styles in the form
1 How I got started: Steve Ells of Chipotle. (2010, October 6). Retrieved October 8, 2015, from http://archive.fortune.com/2010/10/06/smallbusiness/chipotle_started.fortune/index.htm 2 “2014 From 10-K, Chipotle Mexican Grill, Inc.” United States Securities and Exchange Commission. 2014-12-31. Retrieved 2015- 10-8
3 “2014 From 10-K, Chipotle Mexican Grill, Inc.” United States Securities and Exchange Commission. 2014-12-31. Retrieved 2015- 10-8
4%
25%
30%
11%
30%
Northeast Midwest Atlantic South West
12%
8%
6%
66%
8%
FMR Vanguard Group Sands Capital Other Institutionals Others
Company and Industry Overview
- 3 -
of ShopHouse Southeast Asian Kitchen and Pizzeria Locale and not pushing any type of rapid
expansion. Additionally, given its limited brand recognition overseas and overall greater risk
internationally, only modest international expansion is planned.
RESTAURANT INDUSTRY – THE PLAYING FIELD
Chipotle Mexican Grill, Inc. takes up a unique position within the restaurant industry. Its business model
combines fast food with the casual dining industry. The restaurant industry is defined by several factors
and success drivers. Most fast food restaurants franchise their restaurant due to funding or location-
picking. Chipotle owns all their restaurants, as rather usual for casual dining restaurants, to stay in control
and maintain its image. Another current issue are the increasing wages and thus labor costs within the
industry. A trend of retaining employees has begun. In addition, pressure to serve higher quality of food
has increased costs and caused many fast food chains to start closing locations. The growing trend to eat
healthy and gain information about the origin and quality of ingredients has hurt firms which don’t have
the build-your-own model allowing customer to customize their food. One, if not the biggest selling point
of the fast food industry, is to satisfy the customer’s desire for convenience. With new technology, such as
mobile development and advanced ordering, fast food chains have become even more convenient.
Currently the S&P Supercomposite Restaurant Index has risen 13.2% in 2015.4 As consumers tastes
change restaurants try to continue to drive in traffic into their establishments. A huge driving factor for
this is customer loyalty. The trend of health consciousness among consumers has risen causing them to
look for healthier options when eating out. With the rise in awareness of additives and the quality of food,
companies moving toward this direction are increasing their customer loyalty. In addition technology
factors are also affecting the industry, with the increase in technology innovation restaurants can now
implement these to try to decrease the wait time for ordering or paying. Companies that are using these
new technologies are said to be moving in the right direction as it provides more ease for the consumer.
With the demand of increase in minimum wage many restaurants are facing the difficulties in trying to
manage this increase in labor cost. Similarly increasing cost in commodities impact the restaurant
business, depending on the type of food offered, some companies are impacted more heavily than others.
For example with the slight decrease in the price of cheese pizza chains are benefiting from this as there
cost decrease.5 In attempts to curve the increase in labor cost many companies are reducing their menus
to contain less options and also trying to improve the efficiency of workers. Overall, the industry appears
to be doing well as it outperformed the S&P 500’s 0.5% gain.6
4 “Bloomberg Intelligence: North American Restaurant Primer“ , Jennifer Bartashus, BI Industry Analyst. Retrived 2012-10-7 5 “Bloomberg Intelligence: North American Restaurant Primer“ , Jennifer Bartashus, BI Industry Analyst. Retrived 2012-10-7. Pg. 9 6 “Bloomberg Intelligence: North American Restaurant Primer“ , Jennifer Bartashus, BI Industry Analyst. Retrived 2012-10-7. Pg. 2
Financial Ratio Analysis
- 4 -
Source: Calculations based on company and Bloomberg data. Darden & Brinker financials as of FY Jun’15. For calculation definitions, see Appendix.
Table 1 - Financial Ratios across Industry
Key Ratios 2012 2013 2014 2012 2013 2014 2012 2013 2014 2012 2013 2014 2012 2013 2014 2012 2013 2014 2012 2013 2014
Diluted EPS (in $) 8.8 10.5 14.1 0.9 0.0 1.4 2.0 2.5 2.9 3.6 1.8 1.4 3.4 2.4 2.3 1.9 2.2 2.3 1.0 1.1 1.2
P/E 50.1x 44.8x 56.6x 32.2x 33.6x 34.4x 20.9x 28.5x 32.5x 14.0x 14.1x 26.5x 21.1x 20.9x 24.8x 16.5x 18.0x 18.8x 19.0x 22.2x 24.1x
ROE 24.3% 23.5% 25.1% 29.1% 0.2% 42.4% N/A N/A N/A 25.2% 21.1% 13.6% 75.5% 47.6% 54.2% 40.4% 71.1% 145.0% 13.9% 14.3% 14.4%
Profit Margin (%) 10.2% 10.2% 10.8% 10.4% 0.1% 12.6% 7.1% 7.9% 8.4% 5.9% 7.0% 4.6% 11.7% 8.3% 7.9% 5.4% 5.7% 5.3% 5.6% 5.7% 5.5%
Total Asset Turnover 1.8x 1.7x 1.8x 1.7x 1.5x 1.5x 3.5x 3.4x 3.2x 1.4x 0.9x 0.9x 1.5x 1.5x 1.6x 1.9x 2.0x 2.0x 1.6x 1.7x 1.7x
Leverage (Total Assets/Equity) 1.4x 1.3x 1.3x 1.6x 2.1x 2.3x N/A N/A N/A 3.0x 3.3x 3.3x 4.2x 3.9x 4.4x 3.9x 6.3x 13.9x 1.5x 1.5x 1.5x
Total Revenue (in $m) 2,731 3,215 4,108 13,300 14,867 16,448 1,678 1,802 1,994 7,999 5,921 6,286 13,633 13,084 13,279 2,821 2,846 2,909 1,263 1,423 1,582
EBITDA (in $m) 545 636 828 2,578 330 3,830 316 340 389 1,089 678 613 2,939 2,519 2,296 357 388 378 157.175 171.277 189.628
EBITDA Margin (%) 20.0% 19.8% 20.2% 19.4% 2.2% 23.3% 18.8% 18.9% 19.5% 13.6% 11.5% 9.8% 21.6% 19.3% 17.3% 12.7% 13.6% 13.0% 12.4% 12.0% 12.0%
No. of Restaurants 1,410 1,595 1,783 18,066 19,767 21,366 10,255 10,886 11,629 1,994 2,138 1,501 39,014 40,233 41,546 1,581 1,591 1,615 392 420 451
company owned 1,410 1,595 1,783 9,405 10,194 10,713 388 390 377 1,994 2,138 1,501 10,406 8,813 9,421 865 877 884 320 346 372
franchised 0 0 0 8,661 9,573 10,653 9,867 10,496 11,252 0 0 0 28,608 31,420 32,125 716 714 731 72 74 79
No. of Employees 37,310 45,340 53,090 160,000 182,000 191,000 205,000 220,000 240,000 181,468 N/A 206,000 78,450 75,460 69,810 N/A N/A 55,586 40,000 45,700 43,300
Avg. Revenue / Restaurant (in $m) 1.9 2.0 2.3 0.7 0.8 0.8 0.2 0.2 0.2 4.0 2.8 4.2 0.3 0.3 0.3 1.8 1.8 1.8 3.2 3.4 3.5
Avg. Revenue / Employee (in $m) 0.07 0.07 0.08 0.08 0.08 0.09 0.01 0.01 0.01 0.04 N/A 0.03 0.17 0.17 0.19 N/A N/A 0.05 0.03 0.03 0.04
Comparable Sales (y-o-y in %) 7.1% 5.6% 16.8% 7.0% 7.0% 6.0% 4.2% 5.8% 7.2% 1.8% -1.3% N/A 4.0% -2.0% N/A 2.7% 1.0% 0.5% 4.7% 3.4% 4.7%
Cash Conversion Cycle -6.1x -4.9x -3.5x 53.0x 54.0x 44.3x 6.8x 6.1x 7.7x 1.7x 3.0x 4.3x 18.6x 20.1x 15.4x -6.2x -6.1x -5.6x -3.7x -2.2x -1.0x
Fixed Asset Turnover 3.2x 3.3x 3.7x 5.3x 5.1x 4.9x 18.4x 18.5x 17.5x 4.8x 5.1x 5.4x 3.3x 3.0x 3.0x 2.7x 2.8x 2.9x 2.5x 2.5x 2.6x
Inventory Turnover 199.0x 195.5x 210.8x 5.3x 5.4x 6.2x 31.1x 30.3x 37.9x 12.1x 18.0x 29.6x 34.1x 31.8x 33.1x 92.3x 97.4x 103.2x 94.4x 101.3x 98.6x
Other Ratios
Long-term debt ratio 15.9% 15.0% 12.5% 9.7% 22.5% 28.0% N/M N/M N/M 55.3% 53.3% 39.2% 55.9% 56.3% 65.6% 83.9% 93.0% 108.8% 8.8% 7.9% 7.6%
Debt-equity ratio 18.9% 17.7% 14.3% 10.7% 29.0% 38.8% N/M N/M N/M 123.8% 114.2% 64.5% 126.8% 128.7% 190.8% 522.3% 1319.1% NM 9.7% 8.6% 8.2%
Total debt ratio 25.3% 23.4% 21.0% 37.8% 61.1% 51.0% N/M N/M N/M 70.3% 69.5% 61.1% 74.3% 73.9% 80.7% 89.7% 95.8% 105.5% 32.9% 32.3% 34.8%
Times interest earned N/A N/A N/A 61.1x -11.6x 48.1x 3.2x 3.7x 4.3x N/A 2.3x 1.9x 15.4x 7.3x 12.0x 8.8x 8.6x 10.7x N/A N/A N/A
Cash Coverage ratio N/A N/A N/A 77.9x 10.5x 59.1x 3.1x 3.8x 4.5x N/A 4.6x 3.6x 15.4x 7.3x 12.0x 13.3x 13.5x 15.7x N/A N/A N/A
NWC to assets 21.6% 23.2% 24.9% 24.2% 0.8% 10.5% 16.1% 18.4% 26.3% -9.4% 5.0% -2.3% -3.1% -6.6% -9.2% -13.2% -17.1% -15.9% -4.6% -3.4% -7.2%
Current ratio 2.9x 3.3x 3.6x 1.9x 1.0x 1.4x 1.3x 1.4x 1.6x 0.5x 1.2x 0.9x 0.9x 0.7x 0.7x 0.5x 0.5x 0.5x 0.8x 0.8x 0.7x
Quick ratio 2.6x 3.0x 3.2x 1.1x 0.7x 0.8x 0.7x 0.5x 0.6x 0.1x 0.1x 0.5x 0.5x 0.4x 0.2x 0.2x 0.2x 0.2x 0.6x 0.7x 0.6x
Cash ratio 2.5x 2.9x 3.1x 0.9x 0.6x 0.6x 0.0x 0.0x 0.0x 0.1x 0.1x 0.4x 0.4x 0.3x 0.2x 0.2x 0.1x 0.1x 0.5x 0.5x 0.4x
Interval Measure 639.6x 697.1x 723.6x 167.8x 157.2x 138.8x N/A N/A N/A 70.1x 67.4x 212.4x 290.3x 200.1x 112.2x 125.2x 121.4x 131.0x 272.7x 302.1x 274.2x
Receivables Turnover 216.9x 157.5x 139.6x 30.5x 28.4x 27.6x 18.2x 17.7x 17.5x 75.5x 74.3x 83.6x 46.4x 42.2x 83.3x 70.1x 67.9x 63.6x 90.6x 68.1x 53.3x
Days Inventory Outstanding 1.8 1.9 1.7 69.3 67.3 58.6 9.6 8.9 8.9 30.1 20.2 12.3 10.7 11.5 11.0 4.0 3.7 3.5 3.9 3.6 3.7
Days Receivables Outstanding 1.7 2.3 2.6 12.0 12.9 13.2 20.0 20.6 20.8 4.8 4.9 4.4 7.9 8.6 4.4 5.2 5.4 5.7 4.0 5.4 6.9
Days Payables Outstanding 9.6 9.1 7.9 29.5 25.4 27.3 22.7 23.4 22.0 22.0 19.4 14.8 0.0 0.0 0.0 15.3 15.2 14.8 11.6 11.2 11.6
Return on assets 18.0% 17.8% 19.6% 17.8% 0.1% 18.6% 23.5% 28.5% 28.4% 6.4% 4.1% 10.9% 17.9% 12.3% 12.3% 11.3% 10.5% 13.4% 9.3% 9.6% 9.6%
Payout ratio 0 0 0 0.4 80.6 0.4 150.6 31.0 33.8 1.1 1.6 1.4 0.4 0.6 0.7 0.4 0.4 0.4 0.5 0.4 0.5
Plowback ratio 1 1 1 0.6 -79.6 0.6 0.0 0.0 0.0 -0.1 -0.6 -0.4 0.6 0.4 0.3 0.6 0.6 0.6 0.5 0.6 0.5
Sustainable Growth Rate 24.3% 23.5% 25.1% 17.7% -13.8% 25.5% N/A N/A N/A -1.9% -7.8% -13.3% 51.7% 22.0% 19.3% 46.1% 85.3% 92.8% 7.7% 8.4% 7.6%
Operating Margin 16.9% 16.8% 17.5% 15.0% -2.2% 18.7% 29.9% 30.5% 29.8% 6.8% 4.9% 5.4% 16.8% 13.7% 11.7% 9.0% 8.3% 10.4% 8.7% 8.4% 8.2%
Texas RoadhouseChipotle Starbucks Dominos Darden Yum Brinker
Financial Ratio Analysis
- 5 -
KEY RATIO ANALYSIS ACROSS INDUSTRY
DuPont Analysis
The DuPont analysis indicates a stable Return on Equity [ROE] for Chipotle with a slight upwards trend
over the years. However, Chipotle has consistently had lower ROE than most of its main competitors over
the last five years. This is a trend that continued through FY2014. However, the main driver for the lower
ROE is debt utilization. They have slightly above average Profit Margin and Total Asset Turnover, but have
the lowest level of debt to equity and as a result have a low Leverage.
Figure 3 - DuPont Analysis Split
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Total Asset Turnover
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Figure 4 - Return on Equity 2010 - 2014
2010 2011 2012 2013 2014
Note: Calculations based on Bloomberg data.
Note: Calculations based on Bloomberg data.
Financial Ratio Analysis
- 6 -
Profitability
Figure 5 - Current Trading Q3/2015 across Industry (Sales)
Source: Bloomberg data.
As it can be seen in Figure 5 and 6, Chipotle is a mid to large-size player within the industry with LTM
Q3’15 revenues of $4.4bn and an EBITDA of $1.0bn. Given different Franchise agreements across the
industry and therefore different asset structures, EBITDA is a good measurement of the operational
Performance. Chipotle’s EBITDA margin of 21.5% indicates a slightly higher operational profitability than
the median of the peer group with 20.3%. Given the focus of Chipotle on high quality ingredients, extensive
marketing efforts and increasing labor costs (Chipotle has begun to increase labor wages, more
promotions and hosts benefits such as paid time off and reimbursement), it underlines the resilient
business model of Chipotle. Chipotle has been at the forefront when it comes to high quality ingredients
which is why their supply costs are higher than their labor, normally reverse in the industry.
Figure 6 - Current Trading Q3/2015 across Industry (EBITDA & EBITDA Margin)
Source: Bloomberg data.
4.4
18.4
2.1 2.0 6.9
13.2
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0
10
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30 Sales in $bn
1.0
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0.4 0.4 0.8
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6 EBITDA in $bn
21.5% 23.7% 22.1% 12.8% 21.1% 15.3% 11.7%
% EBITDA Margin
mARGH
19.5%
Financial Ratio Analysis
- 7 -
Restaurant Revenue Analysis
Figure 7 - Detailed analysis of restaurant sales as of FY2014
Note: Calculations based on Company and Bloomberg data. Darden & Brinker financials as of Jun’14.
Looking at the detailed analysis of restaurant revenues (Figure 7), Sales per Store are in correlation with
the number of franchised restaurants. Whereas the competitors with high number of franchised stores
indicate a lower Sales per Store metric (ranging from $0.2m to $1.8m), Chipotle, Darden and Texas
Roadhouse, which do not have any franchise agreements, depict a higher Sales per Store. Of these three,
Chipotle has the lowest Sales per Store with $2.3m. Nevertheless, this goes in line with the number of
employees, respectively the Sales per Employee (Figure 8). While Texas Roadhouse and Darden have low
revenues per employee compared to the industry, Chipotle is above the average of the peer group.
Overall, Darden and Texas Roadhouse achieve higher Sales per Store, but at the same time engage more
employees, whereas Chipotle seems to reach above average results in both, Sales per store and per
employee.
At the same time, Chipotle’s Comparable Sales (defined as percentage increase (decrease) of same store
sales as compared to the corresponding period last year for restaurants older than 12 months) were
recently high above the industry average with solid metrics the years before. This compliments the
successful implementation of marketing efforts made by Chipotle as well as how consumers value the
menu, which is not only driven by convenience but by a focus on the industry trend of health and
environment conscious consumers living an active lifestyle.
Figure 8 - Restaurant sales per employee as of FY2014
2.3
0.8 0.2
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Sales/Store in $m
0.08 0.09
0.01 0.03
0.19
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0.00
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0.20 Sales/Employee in $m
16.8% 6.0% 7.2% N/A N/A 0.5% 4.7%
% Comparable Sales (yoy in %)
mARGH
Note: Calculations based on Bloomberg data.
Financial Ratio Analysis
- 8 -
Other Key Ratios
P/E ratio
Chipotle is highly valued based on the P/E Ratio compared to its peer group. Within the last years,
Chipotle was consistently valued above average. This reflects its strong growth as well as the stable
business model. The growth and investment strategy of Chipotle is perceived well by the market
underscored by a share price development of +26.1% over the last three years (including recent
drawback caused by e-coli incidents).
Cash Conversion
Within the industry a negative Cash Conversion Cycle [CCC] is quite common. Given the business to
consumer model of the restaurant industry, firms usually collect payments from customers before
paying suppliers. Chipotle is well positioned with a negative CCC above the average of the peer group,
which underlines its good supplier relations. This supports our view that Chipotle will be able to grow
its supplier network in line with its strategic expansions in the future.
Fixed Asset Turnover
Given the differences in the industry based on franchise agreements of certain competitors, this metric
varies across industry. Despite Chipotle owning all its restaurants, the fixed asset turnover is in line with
the industry average, which depicts an efficient usage of Chipotle’s fixed assets.
Inventory Turnover
Chipotle has by far the highest Inventory Turnover within the peer group. This underlines the focus on
fresh high quality ingredients, which are an important part of Chipotle’s image. In light of this metric,
the strategy and image of Chipotle seems to be based on fundamental business activities that support
both.
Forecast of Financial Statements
- 9 -
FINANCIAL STATEMENTS – 2015-2020
Financial Statements Forecast 2015-2020 in $ million
Balance Sheet Items 2012 2013 2014 2015 2016 2017 2018 2019 2020
Cash & Cash Equivalents 472.9 578.2 758.1 846.5 980.1 1,120.1 1,275.7 1,471.0 1,699.0
Accounts receivables 16.8 24.0 34.8 34.8 42.0 48.6 54.2 63.1 72.9
Inventories 11.1 13.0 15.3 18.7 21.2 23.8 27.6 31.6 36.5
Other current assets 45.9 51.1 70.3 78.4 89.4 103.2 117.4 135.0 156.3
Current Assets 546.6 666.3 878.5 978.4 1,132.7 1,295.7 1,474.8 1,700.8 1,964.6
% of sales 20.0% 20.7% 21.4% 20.7% 20.9% 21.0% 20.9% 20.9% 20.9%
Net PPE 866.7 963.2 1,107.0 1,178.5 1,241.2 1,291.7 1,479.0 1,700.8 1,964.4
% of sales 31.7% 30.0% 26.9% 24.9% 22.9% 20.9% 20.9% 20.9% 20.9%
LT Investments & Receivables 190.9 313.9 496.1 617.8 761.4 868.0 970.4 1,134.0 1,306.3
% of sales 7.0% 9.8% 12.1% 13.1% 14.1% 14.1% 13.7% 14.0% 13.9%
Other non-current assets 64.5 65.9 64.7 94.3 101.3 111.9 133.8 151.1 174.1
Non-Current Assets 1,122.1 1,343.0 1,667.8 1,944.2 2,227.4 2,526.9 2,902.2 3,336.1 3,850.3
% of sales 41.1% 41.8% 40.6% 41.2% 41.2% 41.0% 41.1% 41.1% 41.1%
Total Assets 1,668.7 2,009.3 2,546.3 2,922.6 3,360.1 3,822.5 4,376.9 5,036.9 5,814.9
% of sales 61.1% 62.5% 62.0% 61.9% 62.1% 62.0% 62.0% 62.0% 62.0%
Accounts payables 58.7 59.0 69.6 89.4 97.8 110.9 129.4 147.2 170.2
Other Payables 128.0 140.2 176.1 210.0 236.1 269.2 310.1 355.2 410.5
Current Liabilites 186.9 199.2 245.7 299.5 333.9 380.2 439.6 502.5 580.8
% of sales 6.8% 6.2% 6.0% 6.3% 6.2% 6.2% 6.2% 6.2% 6.2%
Income Statement
Sales 2,731.2 3,214.6 4,108.3 4,724.5 5,409.6 6,166.9 7,061.1 8,120.3 9,378.9
% growth 20.3% 17.7% 27.8% 15.0% 14.5% 14.0% 14.5% 15.0% 15.5%
Food, Beverage, Packaging 891.0 1,073.5 1,421.0 1,630.0 1,866.3 2,127.6 2,436.1 2,801.5 3,235.7
% of sales 32.6% 33.4% 34.6% 34.5% 34.5% 34.5% 34.5% 34.5% 34.5%
Labor 641.8 739.8 904.4 1,063.0 1,190.1 1,356.7 1,553.4 1,786.5 2,063.4
% of sales 23.5% 23.0% 22.0% 22.5% 22.0% 22.0% 22.0% 22.0% 22.0%
Other Cost of Goods Sold 458.0 546.5 665.1 764.9 875.8 998.4 1,143.2 1,314.6 1,518.4
% of sales 16.8% 17.0% 16.2% 16.2% 16.2% 16.2% 16.2% 16.2% 16.2%
Gross Profit 740.3 854.8 1,117.8 1,266.7 1,477.4 1,684.2 1,928.4 2,217.7 2,561.4
% margin 27.1% 26.6% 27.2% 26.8% 27.3% 27.3% 27.3% 27.3% 27.3%
Operating Expenses 279.4 315.3 400.0 443.4 488.8 535.7 588.6 648.5 716.2
% of sales 10.2% 9.8% 9.7% 9.4% 9.0% 8.7% 8.3% 8.0% 7.6%
EBIT 460.9 539.5 717.8 823.2 988.6 1,148.6 1,339.8 1,569.2 1,845.2
% margin 16.9% 16.8% 17.5% 17.4% 18.3% 18.6% 19.0% 19.3% 19.7%
Pretax income 462.7 541.2 721.3 827.2 993.4 1,154.2 1,346.3 1,576.9 1,854.3
% margin 16.9% 16.8% 17.6% 17.5% 18.4% 18.7% 19.1% 19.4% 19.8%
Taxes 179.7 207.0 268.9 318.5 382.5 444.4 518.3 607.1 713.9
% tax rate 38.8% 38.3% 37.3% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5%
Net Income 278.0 327.4 445.4 508.8 610.9 709.8 828.0 969.8 1,140.4
% margin 10.2% 10.2% 10.8% 10.8% 11.3% 11.5% 11.7% 11.9% 12.2%
Other Items
# Restaurants 1,410 1,595 1,783 2,003 2,233 2,474 2,727 2,993 3,273
Net new Restaurants 180 185 188 220 230 241 253 266 280
Comparable Sales (%) 7.1% 5.5% 16.7% 4.7% 4.3% 4.5% 4.5% 4.5% 4.5%
Diluted EPS 8.8 10.5 14.1 15.6 17.9 20.4 23.3 26.8 31.0
Operating Cash Flow 420.0 528.8 682.1 672.4 854.8 955.3 1,081.0 1,286.3 1,484.2
Free Cash Flow 185.0 336.6 478.1 425.7 596.5 684.4 796.2 986.4 1,167.9
EBIT*(1-Taxrate) 281.9 333.1 450.2 506.3 608.0 706.4 824.0 965.1 1,134.8
+ Depreciation 84.1 96.1 110.5 117.6 123.8 128.8 133.4 153.4 158.4
- CapEx 197.0 199.9 248.2 244.2 255.3 267.5 280.8 295.3 310.8
+/- ∆ Working Capital 16.0 107.3 165.7 46.1 120.0 116.7 119.7 163.2 185.5
Table 2 – Forecast of Financial Statements
Forecast of Financial Statements
- 10 -
SUSTAINABLE LONG TERM GROWTH RATE ANALYSIS
Since Chipotle Mexican Grill Inc. has not yet paid dividends, our sustainable growth rate table references
hypothetical future payout ratios of 80 to 95% and them against the very consistent ROE numbers for
Chipotle, 23.5 to 25.5%. We believe a realistic long term sustainable growth rate for Chipotle is between
2.0 to 2.5%, which reflects our prediction of long term comparable sales growth of around 2.0%.
UNDERLYING ASSUMPTIONS
Core Assumptions
There are several key assumptions that need to be made when looking at future sales for Chipotle Mexican
Grill, Inc. Most central to our methodology is the arithmetic historic growth average and recognition of a
downward trend of this growth. While Chipotle has experienced exceptional revenue growth in the recent
past by capitalizing on movement to health consciousness, we believe this will slow as Chipotle
approaches market saturation for its product. The saturation can be, and will continue to be, seen through
lower comps and less successful new store openings. In spite of a slightly pessimistic outlook on future
sales, we see fairly consistent returns to equity as a result of healthy profit margin and total asset turnover
and no change in the leverage profile.
Cost of Goods Sold – As a result of Chipotle’s continued commitment to responsibly raised meat and high
quality ingredients, we see cost of goods sold remaining on the higher end of historicals. We believe there
to be a slight lag in the supply of responsibly raised meats, as was evident during the 2015 carnitas
shortage. Lack of competition among suppliers and a desire for quality food will result in higher food
prices for Chipotle. As carnitas are reintroduced, we expect the proportion of food cost to revenues to
return to 34-35% of revenues and stay there for the foreseeable future.
Labor expense – Labor expenditures should remain relatively consistent with increases in sales growth
and are expected to stay within 22% to 23% of revenue. Minimum wage increases in many markets
throughout the country have caused the cost of labor to go up. Frequently, Chipotle is already paying above
the new minimum wage and does not feel a direct impact from the new legislation. While minimum wage
increases seldom affect Chipotle directly, management’s desire to continue to attract top level talent will
force them to adjust laborers’ wages upward. We expect these upward adjustments to pace with revenue
increases.
Comparable Sales – Our projections for comparable restaurant sales are in line with the comp estimates
of management at Chipotle, mainly, low single digit restaurant sales through the next couple years. We see
this as one of the reasons that revenue growth will be lower than historical numbers, when comps were
Sustainable long term growth rate - Retention model
ROE (below) x Plowback Ratio (right) 5.0% 10.0% 15.0% 20.0%
23.5% 1.2% 2.4% 3.5% 4.7%
24.0% 1.2% 2.4% 3.6% 4.8%
24.5% 1.2% 2.5% 3.7% 4.9%
25.0% 1.3% 2.5% 3.8% 5.0%
25.5% 1.3% 2.6% 3.8% 5.1%
Table 3 – Estimation of sustainable long term growth rate
Forecast of Financial Statements
- 11 -
upper single digits to lower double digits. One place where we see the potential for growth in comparable
sales, but believe it will take some time to realize, is in the digital market. We believe the recent addition
of Curt Garner as CIO indicates a focus on the ongoing optimization process of outside orders that Chipotle
has started to increase digital sales.
New Store Openings – New store openings should continue to be in line with stated management
expectations and will maintain the recent trend of low double digit year-on-year growth.
General and Administrative Expenses – We expect general administrative costs to slightly decrease as a
percent of revenue. This decrease is mainly driven by significant spread between new store revenues
compared to increases in administrative salaries.
Balance Sheet Assumptions
The key driver in the balance sheet is a historical arithmetic mean from the three years of 2012, 2013 and
2014. In two cases in particular, there were significant trends that caused us to bias the account to revenue
ratio. Specifically, the Net PPE account had a downward trend that we predict will continue through to
2017, when we assume there will be a leveling off at 21% Net PPE to revenue. In the LT Investments &
Receivables account, there was an upward trend, which we believe will continue upwards to around 14%.
Free Cash Flow Assumptions
In 2014 there was a one-off effect of buying a corporate plane that increased CapEx $24 million. In the
long term, we see CapEx as proportional increasing with new restaurants openings. In 2014, Chipotle
spent on average about $843,000 in development and construction costs per restaurant in the U.S., net of
landlord reimbursements of approximately $60,000, and for all restaurants including international
locations they spent on average about $849,000, net of landlord reimbursements of approximately
$66,000. For new restaurants to be opened in 2015, Chipotle anticipates the average development costs
to decrease slightly primarily due to the mix of locations and categories. Additionally, maintenance CapEx
is seen to range between 10-15% until 2020.
Risk and Return Analysis
- 12 -
OVERVIEW RISK/RETURN ANALYSIS
In order to analyze the risk and return
of Chipotle [CMG US], we compare its
return distribution to Newmont Mining
Corp [NEM] and the S&P 500 Stock
Index [^GSPC] for 120 data points
comprising monthly prices from
January 2006 up to November 2015
(Resulting in 119 monthly holding
period return observations). Table 4
depicts an expected return of 2.8% for
CMG compared to a negative average
return of -0.3% for NEM and 0.5% for
the GSPC. These returns have to be seen
in relation to each assets’ individual
standard deviation as an indicator for the risk correlated. CMG has a slightly higher standard deviation
than NEM, whereas GSPC has the lowest standard deviation with 0.04. Nevertheless, the Sharpe Ratio
(calculated based on the monthly 10yrs Treasury Yield as benchmark rate) indicates that the return of
CMG in relation to its isolated risk is higher than for NEM and GSPC, which underlines a good relation of
return to risk as well as the strong share price development of CMG over the analyzed period.
Furthermore, CMG has a fairly mesokurtic return distribution with a skewness close to zero and a kurtosis
close to 3. This is rather unusual for the 3rd and 4th moment of a return distribution, but might be an
indicator of fairly constant share price development and low volatility. In contrast to the slight negative
skewness exhibited by CMG, the positive skewness of NEM bears a more favorable return distribution
than the negative value for GSPC due to a longer tail of NEM’s returns to the right. This indicates a higher
probability for positive outliers (high positive returns). However, the negative skewness for GSPC results
only in a marginally longer tail to the left. NEM and GSPC in particular both have a highly leptokurtic return
distributions which is displayed through high kurtosis values. As a result, both assets have much higher
peaks than the normally distributed CMG as well as heavier tales with more outlier return points.
Furthermore, we looked at the correlation of CMG with NEM and CMG with GSPC based on the Spearman
coefficient (-1 - low correlation; +1 - high correlation), which is less sensitive to outliers and thus very
useful for taking into account the leptokurtic distributions of NEM and GSPC. The Spearman coefficient
shows a positive correlation between CMG and GSPC and a slightly negative correlation but more or less
no correlation between CMG and NEM. These correlations are in line with the observed expected returns,
which indicated similar return movements of CMG and GSPC as well as the opposed/non-correlated
movement of NEM. The Var-Covariance and Correlation Matrices in Table 5 confirm these observations.
Table 4 - Return Distribution Metrics
Note: Calculations based on historic Bloomberg prices.
CMG US NEM ^GSPC
Exp. Monthly
returns 2.7881% -0.3007% 0.5185%
Standard
deviations 0.11018 0.10752 0.04381
Sharpe Ratio 0.23580 -0.04563 0.07498
Kurtosis 3.08422 3.88815 4.78806
Skewness -0.00722 0.22918 -0.77569
Spearman Rho -0.01455
0.31066
Risk and Return Analysis
- 13 -
The covariance between all three asset
pairs is fairly low. However, CMG and
GSPC have a higher covariance than
NEM with CMG /GSPC.
The Pearson correlation coefficients
show a similar pattern and confirm the
observations made with the Spearman
coefficient. CMG’s returns are fairly
positive correlated with GSPC’s and
rather non-correlated with NEM’s. NEM
and GSPC have a slightly positive correlation as well.
PORTFOLIO SIMULATION
In the following part, we analyzed hypothetical portfolio combinations of CMG and NEM. Table 6 and
Graph 1 show the outcome of each asset allocation and their respective expected monthly return and
standard deviation. The returns vary from -0.3% up to 2.79% with standard deviations from 0.1075 to
0.1102, respectively. Using the Lagrange approach, we solved for the weights of the minimum variance
portfolio, whose metrics are depicted in Table 7. These are in line with the 50/50 mix that can be seen in
Table 6 and Graph 1.
Table 5 - Var-Covariance and Correlation Matrices
Note: Calculations based on historic Bloomberg prices.
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
0.07 0.08 0.09 0.1 0.11 0.12
Graph 1 - Portfolio Analysis - Risk and Expected Return
Weight Chipotle Exp. Monthly
Return
Standard
deviation
0% -0.30% 0.1075
5% -0.15% 0.1023
10% 0.01% 0.0975
15% 0.16% 0.0930
20% 0.32% 0.0890
25% 0.47% 0.0854
30% 0.63% 0.0824
35% 0.78% 0.0801
40% 0.93% 0.0784
45% 1.09% 0.0775
50% 1.24% 0.0773
55% 1.40% 0.0778
60% 1.55% 0.0791
65% 1.71% 0.0812
70% 1.86% 0.0838
75% 2.02% 0.0871
80% 2.17% 0.0909
85% 2.32% 0.0952
90% 2.48% 0.0998
95% 2.63% 0.1049
100% 2.79% 0.1102
Variable Portfolio Analysis
CMG Weight NEM Weight Exp. Monthly
Return Variance
Standard
deviation
48.77% 51.23% 1.21% 0.00597 0.07725
Minimum Variance Portfolio
Table 6 - Portfolio Analysis Table 7 - Minimum Variance Portfolio
CMG US NEM ^GSPC
CMG US 0.0121402 0.0000924 0.0016121
NEM 0.0000924 0.0115606 0.0005977
^GSPC 0.0016121 0.0005977 0.0019190
CMG US NEM ^GSPC
CMG US 1 0.00780 0.33400
NEM 0.00780 1 0.12689
^GSPC 0.33400 0.12689 1
Var-Covariance Matrix
Correlation Matrix
Risk and Return Analysis
- 14 -
CALCULATION OF BETA
To determine the systematic risk of CMG in
comparison to the market [GSPC], we use the
measurement of beta. In order to compute beta, we
ran a regression with CMG as our dependent variable
and GSPC as our independent variable using monthly
returns. Conducting regression analysis allows us to
determine how the effects of the market impact an
individual security or portfolio. In other words, the regression tells us how much the variation in the
market affects the individual security, which in this case is CMG. The assumption we made for using the
S&P 500 Index [^GSPC] as the representation for the market has to do with the idea of diversification. It
is assumed that we can eliminate firm specific risk through diversification. Given that the S&P 500 is
composed of the 500 largest companies in the US, we can claim it has diversified essentially all firm and
industry specific risk and the only risk that needs to be taken into account is systematic risk. Although
running a regression provides us with the beta measurement, we also need to determine the statistical
significance of the Beta. The statistical significance will tell us the probability the relationship in our
regression is accurate. To determine statistically significance we will look at the t-statistic and the p-value,
which should be larger than 1.96 and smaller than 0.05 respectively. We found that CMG had a beta of 0.84, a t-stat of 3.82 and a p-value of 0.0002. The beta for CMG is statistically significant and it is less
volatile than the market, which has a beta of 1. Similarly, we computed the beta of NEM to be 0.31,
however, we found that it was not statistically significant (t-stat: 1.37, p-value: 0.17). It could be said that
there is a 17% chance that the beta of .31 is an inaccurate representation of the relation between returns
of NEM and GSPC and therefore the beta for NEM would not be a good indicator of how the security is
impacted by the systematic market movement.
Additionally, we looked at the R-squared for both CMG and NEM to determine what percentage can be
determined by movements in the GSPC. We found that CMG had an R-squared value of 0.1116, which
means that 11.16% of the movement in CMG can be explained by the movements in GSPC. Similarly, 1.58%
of the movement in NEM can be explained by the movements in GSPC. Both of these stocks have fairly low
R-squared values, which is not that surprising as GSPC only has so much explanatory power on the
movements of individual stocks.
We compared the beta‘s we got to those of other companies such as Yahoo! Finance and Reuters and found
that our values were different. Yahoo! Finance reported beta values of 0.23 and 0.48 for CMG and NEM
respectively7. However, Reuters reported values of 0.35 and 0.308 for CMG and NEM respectively. Both
values differ from the beta values that we computed. The discrepancies can be caused by various different
factors, for example the time frames used may be different. We used historical price data that ranged from
7 NEM Key Statistics | Newmont Mining Corporation Stock - Yahoo! Finance. (n.d.). Retrieved November 16, 2015, from http://finance.yahoo.com/q/ks?s=NEM Key Statistics
CMG Historical Prices | Chipotle Mexican Grill, Inc. Co Stock - Yahoo! Finance. (n.d.). Retrieved November 16, 2015, from http://finance.yahoo.com/q/hp?s=CMG Historical Prices
8 Chipotle Mexican Grill Inc (CMG) Financials | Reuters.com. (n.d.). Retrieved November 16, 2015, from http://www.reuters.com/finance/stocks/financialHighlights?symbol=CMG
Newmont Mining Corp (NEM) Financials | Reuters.com. (n.d.). Retrieved November 16, 2015, from http://www.reuters.com/finance/stocks/financialHighlights?symbol=NEM
Note: Calculations based on historic Bloomberg prices.
CMG US NEM
Beta 0.8405 0.3101
T-Stat 3.8177 1.3674
P-Value 0.0002 0.1741
R-Squared 0.1116 0.0159
Table 8 - Regression Results
Risk and Return Analysis
- 15 -
January 2006 through November 2015, giving us 120 data points. If either Yahoo! Finance or Reuters used
different date ranges then the size of their data will be different and cause their computation of beta to
differ from ours. Another cause for the differences can be the frequency of the returns. We used monthly
returns to compute our beta values but if Reuters chose to use daily or weekly historical prices then this
would also cause their value for beta to differ. Given the turmoil the CMG stock has been through within
the last months, including or excluding certain trading days/periods may certainly affect the Beta value,
too.
REQUIRED RETURNS BASED ON THE CAPITAL ASSET PRICING MODEL [CAPM]
To estimate the required return for CMG and NEM we used the Capital Asset Pricing Model [CAPM]:
𝐸[𝑟𝐴𝑠𝑠𝑒𝑡] = 𝑟𝑓 + 𝛽[𝑟𝐺𝑆𝑃𝐶 − 𝑟𝑓]
For the risk free rate (rf), we are using the monthly 10-year treasury yield, which is .0019 or .19%. The
betas (β) were calculated above in the regression analysis and the market return (rGSPC) is based on the
average return of the GSPC. Given this information the required returns for CMG and NEM are 0.46% and
0.29% respectively.
PRELIMINARY RECOMMENDATION
Provided the expected returns we can say that CMG is underpriced due to the fact that on average it earns
2.79%, while its required return is 0.46%. The market/investor requires a return of 0.46%, but based on
our analysis, the expected average return lies at 2.79%, thus the stock is undervalued. Using the same
CAPM formula, we determined that the required return for NEM is 0.29%. In contrary to CMG, the
expected return (-0.3%) of NEM is lower than its required return, which results in NEM being overpriced.
In our view, the market is not being compensated for the relative market risk of NEM and hence, NEM is
overvalued.
Corporate Valuation
- 16 -
DISCOUNTED CASH FLOW MODEL
The first model we used to determine the fundamental value of Chipotle is a two-step Discounted Cash
Flow Model [DCF]. Table 9 summarizes our forecasts up to FY2018 using FY2015 as the basis year. This
3-years period is in line with the management forecast period, which we see as a period of higher growth
rates converging towards our long term growth rate of c. 2.0%.
Table 9 - Free Cash Flow Forecasts
Based on these forecasts, Table 10 provides an overview of the DCF model. Chipotle has no interest
bearing debt and thus an Equity Ratio of 100%. Hence, the WACC is purely dependent on the Cost of Equity,
which we calculated with the Capital Asset Pricing Model. The WACC of 5.6% is used as the discount rate
for the Free Cash Flows resulting in a total present value of $1,855.0m.
Table 10 - Model Overview
Table 11 depicts the results of the DCF model in dependence of the long term growth rate and the WACC.
These mainly affect the terminal value (minor changes in the PVs of the FCF), which has been calculated
based on the perpetuity growth model. In line with our assumptions of a long term growth rate of about
c. 2.0%, the share price implied ranges between $605.5 and $693.1.
Overview DCF - FCF Forecasts
2015 2016 2017 2018
Sales 4,724.5 5,409.6 6,166.9 7,061.1
COGS 3,457.8 3,932.2 4,482.7 5,132.7
Gross Profit 1,266.7 1,477.4 1,684.2 1,928.4
SG&A 443.4 488.8 535.7 588.6
EBITDA 940.8 1,112.4 1,277.4 1,473.2
Depreciation 117.6 123.8 128.8 133.4
EBIT 823.2 988.6 1,148.6 1,339.8
Taxes 318.5 382.5 444.4 518.3
NOPAT 506.3 608.0 706.4 824.0
+ Depreciation 117.6 123.8 128.8 133.4
- CapEx 244.2 255.3 267.5 280.8
+/- ∆ Working Capital 46.1 120.0 116.7 119.7
FCF 425.7 596.5 684.4 796.2
Discount-Rate 1.1 1.1 1.2
PV(FCF) 564.9 613.8 676.3
DCF - Overview
Equity Share 100%
Cost of Equity 5.59%
WACC 5.59%
Sum of PVs(FCF) 1,855.0
# Shares 31,193,000
Table 11 - Sensitivity Analysis
DCF - Sensitivity Table
Growth Rate
WACC 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
5.0% 552.6 616.9 699.6 809.8 964.2 1195.7
5.5% 496.5 547.5 611.2 693.1 802.3 955.1
6.0% 450.6 491.9 542.4 605.5 686.6 794.8
6.5% 412.4 446.5 487.4 537.4 599.9 680.3
Corporate Valuation
17
RESIDUAL INCOME MODEL
In order to reduce the weight of the terminal value and thus the dependence on the long term growth rate
as a decisive factor for the enterprise value of Chipotle, we included a residual income model. This
valuation model results in a fundamental value of the firm that largely stems from the assets already in
place. Furthermore, this model is useful for companies that do not pay out dividends. The fundamental
value combines the current book value of the total assets (BVA0) as well as the discounted Economic Value
Added (EVA) over the forecasted period, as described by the following formula:
𝑉 = 𝐵𝑉𝐴0 +∑ 𝐸(𝐸𝑉𝐴𝑡)
(1 +𝑊𝐴𝐶𝐶)𝑡
𝑇
𝑡=1
The terminal value was again calculated using the perpetuity growth model. Table 12 summarizes the
forecasts for the EVA and its components (EVA = NOPAT - Capital Charge). The WACC used was the same
as used in the DCF-Model (5.6%).
Table 12 - Economic Value Added (EVA) & Book Value Assets (BVA) Forecasts
The results of RI-Model are shown in Table 13, sensitized for the long term growth rate and WACC. Given
a long term growth rate of c. 2.0%, the share price ranges from $545.3 to $627.4.
Table 13 - Sensitivity Analysis
Overview RI - Forecasts
2015 2016 2017 2018
NOPAT 506.3 608.0 706.4 824.0
BVA 2,922.6 3,360.1 3,822.5 4,376.9
Capital Charge (WACC*BVAt-1) 142.4 163.4 187.9 213.7
Economic Value Added 363.9 444.6 518.5 610.3
Discount-Rate 1.1 1.1 1.2
PV(EVA) 421.0 465.0 518.4
Residual Income - Sensitivity Table
Growth Rate
WACC 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
5.0% 532.4 583.5 649.2 736.9 859.5 1043.6
5.5% 475.9 515.1 564.2 627.4 711.6 829.4
6.0% 429.6 460.5 498.2 545.3 605.9 686.7
6.5% 391.2 415.8 445.4 481.6 526.7 584.8
Corporate Valuation
18
COMPARABLE VALUATION
To put the estimated share price ranges of our two fundamental value models into perspective, we are
using a comparable valuation as a comparison. Based on our universe of suitable competitors, we
calculated the Price-Earnings, Enterprise Value/EBITDA and the Enterprise Value/Sales Ratios to analyze
how the peer group is currently priced by the market. Figure 9 shows an overview of the complete peer
group. However, we are focusing on Starbucks, Wendy’s and Dominos as the relevant peer group.
Figure 9 - Overview of relative values of peer group
Given Chipotle’s unique market position, we focused on key industry metrics such as EBITDA-margin,
inventory turnover and comparable sales to determine the relevant peer group (see Part 1 for details).
Table 14 indicates the range of the multiples and implied share prices based on the relevant peers. Our
2015FY forecasts we used for EPS, EBITDA, Sales and EV were $16.3, $940.8, $4724.5 and $16,481.2,
respectively.
Table 14 - Overview of Comparable Valuation
Source: Yahoo Finance and Bloomberg as of 12/07/2015.
.0x
10.0x
20.0x
30.0x
40.0x
Starbucks Wendys Dominos Yum Texas Roadhouse
Darden McDonalds Brinker
Comparable Valuation
P/E EV/EBITDA EV/Sales
Overview - Comparable Valuation
P/E EV/EBITDA EV/Sales
Starbucks 34.2x 21.7x 4.9x
Wendys 38.0x 13.1x 2.6x
Dominos 34.5x 18.4x 3.6x
Yum 34.9x 16.2x 2.7x
Texas Roadhouse 27.1x 12.1x 1.4x
Darden 25.2x 9.7x 1.2x
Brinker 14.8x 8.2x 1.3x
Overall Average 29.8x 14.2x 2.5x
Average Relevant Peer Group 35.5x 17.7x 3.7x
High 38.0x 21.7x 4.9x
Average Price 577.5 534.5 555.9
High Price 617.0 653.6 736.1
Corporate Valuation
19
FINAL RECOMMENDATION Figure 10 - Overview of Valuation Results
As already indicated in Part 3 with
a required return of 0.46% and an
expected return of 2.78%, Chipotle’s
stock is undervalued. The results of
the various valuation methods used
above are summarized in Table 15
and Figure 10. Our target price lays
within the range of $595.9 and
$699.2. Given Chipotle’s position in
the industry with a lack of comparable competitors, we weighed the DCF and the RI Model at 25% each,
while weighing all three comparable valuation approaches with composed 50%. Based on the current
share price of $555.5 and an average target price of $647.6, we recommend a Strong Buy for Chipotle
with an upside potential of 7.3% up to 25.9%. These findings are underlined by the broker consensus
sourced from Bloomberg, which indicates a 12 months target price of $692.8 and 54.8% of
recommendations being on Buy.
500.0 550.0 600.0 650.0 700.0 750.0
P/E
RI
DCF
EV/EBITDA
EV/Sales
Corporate Valuation Ranges
$647.6$555.5
Table 15 - Overview Corporate Valuation Results
Overview Valuation Ranges
Method Low High Delta Average
P/E 577.5 617.0 39.5 597.2
RI 545.3 627.4 82.1 586.4
DCF 605.5 693.1 87.6 649.3
EV/EBITDA 534.5 653.6 119.1 594.0
EV/Sales 555.9 736.1 180.2 646.0
Average 595.9 699.2 103.3 647.6
Appendix
- 20 -
Financial Ratio Definition and Calculation
Financial Ratios Definition
Key Ratios Calculation
Diluted EPS (in $) Earnings per number of diluted shares
P/E Share price per diluted EPS
ROE Net Income / Bookvalue of Equity
Profit Margin Net Income / Total Revenue
Total Asset Turnover Total Revenue / Total Assets
Leverage (Total Assets/Equity) Total Assets / Equity
EBITDA Margin EBITDA / Total Revenue
Avg. Revenue / Restaurant Total Revenue / Number of restaurants
Avg. Revenue / Employee Total Revenue / Number of employees
Comparable Sales (y-o-y in %) Change in sales per restaurant y-o-y for restaurants >12mths.
Cash Conversion Cycle DIO + DRO - DPO
Fixed Asset Turnover Total Revenue / Net Fixed Assets
Inventory Turnover Cogs / Avg. Inventory
Other Ratios
Long-term debt ratio Long-term Debt / (Long-term Debt + Equity)
Debt-equity ratio Long-term Debt / Equity
Total debt ratio Total liabilities / Total assets
Times interest earned EBIT / Interest payments
Cash Coverage ratio (EBIT + Depreciation) / Interest payments
NWC to assets (Current Assets - Current Liabilities) / Total assets
Current ratio Current Assets / Current liabilities
Quick ratio (Cash+Marketable Securities+Receivables) / Current liabilities
Cash ratio (Cash+Marketable Securities) / Current liabilities
Interval Measure (Cash+Marketable securities+Receivables) / Avg. daily operation expenditures
Total Asset Turnover Total Revenue / Avg. Total assets
Receivables Turnover Total Revenue / Avg. Receivables
Days Inventory Outstanding (DIO) Avg. Inventory / (Cogs / 365)
Days Receivables Outstanding (DRO) Avg. Receivables / (Total Revenue / 365)
Days Payables Outstanding (DPO) Avg. Payables / (Cogs / 365)
Return on assets Net Income / Total Assets
Payout ratio Dividends / Net Income
Plowback ratio 1 - Payout ratio
Sustainable Growth Rate Plowback Ratio * ROE
Operating Margin EBIT / Total Revenue
