Post on 17-Nov-2015
description
Chipotle Mexican Grill (CMG)
Recommendation: BUY
Billy Duberstein
March 12, 2015
This report is published for informational purposes only by students of the Michael Price Student Investment Fund, a
student-run organization the Leonard N. Stern School of Business at New York University.
Current Price: $660
Present Value est.: $800
Upside: 21%
1-year Price Target: $865
Upside: 31%
A Video
Back to the Start
https://www.youtube.com/watch?v=aMfSGt6rHos
A Quotation
In addition, though marginal businesses purchased at cheap prices may be
attractive as short-term investments, they are the wrong foundation on which
to build a large and enduring enterprise. Selecting a marriage partner clearly
requires more demanding criteria than does dating. From my perspective,
though, Charlies most important architectural feat was the design of todays
Berkshire. The blueprint he gave me was simple: Forget what you know
about buying fair businesses at wonderful prices; instead, buy
wonderful businesses at fair prices.
-- Warren Buffett, 50th annual shareholder letter
Chipotle Mexican Grill - Business Description
Fast Casual QSR Mexican Restaurant
1,783 Restaurants
Includes 17 International Chipotles
(Canada, London, Paris, Frankfurt)
9 Shophouse Asian Kitchens (Washington
D.C. and LA)
2 Pizzeria Locales (Denver)
Catering ~ 1.3% sales
Found in 1993 in Denver Colorado
3/10/2015
Ticker NYSE: CMG
Price $660.77
Market Cap 20.3 B
P/E (ttm) 46.34
Forward P/E 31.74
EBIT Margin 17.47%
Net margin 10.84%
Cash + Inv. 1.25 B
Debt $0
Revenue (ttm) $4.1 B
Net income $445 M
FCF(est.) 400 M
Short % Float 2.80%
52 week
range
472.41-
727.97
Investment Thesis
Highest-Quality Name in Secular Tailwind
Food with Integrity brand is food becoming a credence good?
Unique Business Model*
Industry-leading growth rates AND margins, no debt
Enormous TAM
Greatly increase store count
Further room for store outperformance
Intangibles
Management Team plus board
Unique employee culture
Good Entry Point
Current pessimism sets up for surprises
History of guiding conservatively, embarrassing prominent naysayers
Business Model
Do very few things and do them well.
Invest and Spend in higher-quality food than other fast food and QSR chains
- Antibiotic-free, hormone-free dairy and meat, Organic and Non-GMO when practical
- Humanely raised unconfined animals with exposure to outdoors and space
- Sustainably raised, local farms
- Use classic cooking techniques in open kitchens, braising and slow-cooking meats
Keep costs down by
- Never changing menu limits advertising spend, simplifies process
- Employee advancement incentivizes low-end workers, limits turnover, improves service
- Sparse dcor
- Throughput through assembly-line serves people quickly/ efficiently
Food With Integrity brand being established
Other Aspirational Consumer Brands have done well
?
Food With Integrity brand Fits with Secular Tailwind
According to Whole Foods, the organic food sector has grown by 20%
CAGR over the past 10 years Kroger claims it is 12%. Either way,
the entry of giants like Kroger, Walmart, and General Mills into organic
prove this is not a fad.
A recent FDA survey found that for the first time, more than half of US
consumers read the labels on their food.
Is food becoming a credence good?
87% of fast casual diners say they prefer to eat foods that are grown
locally up from 70% in 2011.
86% ingredients raised or grown in a more responsible way taste
better, up from 76% in 2011.
73% feels it's important to buy organic for certain food items up from
61% in 2011.
69% try to eat meat that has been raised responsibly and thats up
53% in 2011.
Evidence: Most recent Quarter: MCD comps - 4.0% CMG + 16.1%
vs.
Food With Integrity Chipotle over Rivals
According to Brand Keys, a consultancy
measuring customer loyalty and engagement,
rated Chipotle the #1 restaurant brand in the
casual/ fast dining category
Industry study shows that Chipotle is 3rd-most
popular overall brand among teens, up from #8
in 2013
Millennials 75% more likely to choose Chipotle
over other brands (Q4 conference call)
The upshot: Chipotle is extremely popular
with a young generation that are likely to
become lifelong customers.
http://brandkeys.com/
Food With Integrity Unconventional marketing
Sponsored satirical show on Hulu
Viral Videos , Long-form
Commercials
Cultivate Music Festivals
Food With Integrity Unique Employee Culture
Emphasizes hiring entrepreneurial top-performers
- Seeks out employees passionate about food
- Hands on training in classic cooking techniques
- Internal Promotions: 90% of salaried management and about 98%
of hourly management coming from internal promotions
Restauranteurs
- Best general managers who improve teams promoted to
Restauranteur get stock options
- Restauranteurs train other restaurants. Once they have improved 4
restaurants, they can be promoted to field leadership
Food With Integrity Growth Seeds
Shophouse Southeast Asian Kitchen 9 Restaurants (Washington D.C, LA)
Pizzeria Locale - 2 Restaurants (Denver, CO)
Total Addressable Market
Mission:
Our mission is to change the way
people think about and eat fast food.
McDonald's 36,258
Yum Brands 40,000
Domino's 11,600
Wendy's 6,515
Starbucks 21,656
Panera 1,880
Jack in the Box 2,800
Dunkin 11,310
Red Robin 514
Chipotle 1,783
Restaurants
Management
Founder and Co-CEO Steve Ells
- Former Chef
- Studied at Culinary Institute of America in Hyde Park, NY
- Sous chef under Jeremiah Tower at Stars restaurant in
San Francisco
- Started Chipotle in 1993 in Denver, CO.
Co-CEO - Montgomery Moran
- Chief Executive Officer of the Denver law firm Messner &
Reeves, LLC
- With Chipotle since 1996
Board of Directors
- Includes 2 former McDonalds executives
- Kimball Musk (brother to Elon)
Recent Numbers Steadily Improving
Key Financials
For the Fiscal Period Ending 12 months
Dec-31-
12 months
Dec-31-
12
months
12 months
Dec-31-
12 months
Dec-31-2014A
Currency USD USD USD USD USD
Total Revenue 1,835.9 2,269.5 2,731.2 3,214.6 4,108.3
Growth Over Prior Year 20.9% 23.6% 20.3% 17.7% 27.8%
Gross Profit 692.3 840.4 1,027.0 1,202.2 1,552.0
Margin % 37.7% 37.0% 37.6% 37.4% 37.8%
EBITDA 363.0 431.3 545.0 635.5 828.3
Margin % 19.8% 19.0% 20.0% 19.8% 20.2%
EBIT 294.1 356.4 460.9 539.5 717.8
Margin % 16.0% 15.7% 16.9% 16.8% 17.5%
Earnings from Cont. Ops. 179.0 214.9 278.0 327.4 445.4
Margin % 9.7% 9.5% 10.2% 10.2% 10.8%
Net Income 179.0 214.9 278.0 327.4 445.4
Margin % 9.7% 9.5% 10.2% 10.2% 10.8%
Diluted EPS Excl. Extra Items 5.64 6.76 8.75 10.47 14.13
Growth Over Prior Year 42.8% 19.9% 29.4% 19.7% 35.0%
Source: Capital IQ
More Recent Numbers Restaurant Stats
Restaurant Level Margins 2014: 27.2%
- Up 0.6% from prior year
** Pricing Power** - CMG raised prices ~ 6.5% mid-year with no letup in
traffic. Price raise affected comps by 3.8% this year
Valuation Comps
Industry Classifications
Fast-Food Restaurants
(Primary) 2 Year Beta
[Latest]
P/LTM
Diluted EPS
TEV/LTM EBITDA
[Latest] (x)
Net Income
Margin % [LTM]
Revenues, 1 Yr
Growth % [LTM] (%) Total Debt
Cash And
Equivalents
Market
Capitalization
Total 8.11 432.0 485.0 243.0 193.2 32,888.3 5,289.6 184,673.9
Average 0.58 30.9 28.5 12.8 11.4 1,731.0 278.4 9,719.7
Minimum 0.0 1.27 10.3 ( 7.18) ( 17.1) 0 0.12 227.9
Median 0.5 34.15 15.9 7.92 11.8 109.9 13.1 636.3
Maximum 1.05 48.9 141.3 75.8 47.9 14,997.2 2,077.9 92,546.1
Standard Deviation 0.3 12.4 33.7 19.7 14.2 4,008.8 609.2 22,021.1
Market Cap. Weighted Avg. 0.61 28.0 20.6 13.6 3.1 9,247.2 1,381.5 N/A
Chipotle Mexican Grill,
Inc. (NYSE:CMG)
0.487 46.7 23.8 10.8 27.8 0 419.5 20,311.3
Debt/E Unlevered
Median Beta 0.5 0.18 0.45
CMG levered 0.43
19 US- Based Fast-Food Companies
Valuation Trailing P/E This year
Valuation 15-Year DCF Base Case Assumptions
5Year Top-Line: 16%
Terminal Year Top-line: 3%
Grows from 4.B to 20 B in revenues in 15 years
$20B 15 years from now is ~ $14.8B in todays dollars assuming 2% inflation, or about the
the size of McDonalds (on a revenue basis).
Assuming $2.5M/ restaurant (todays number) that = 5900 restaurants = 270/ year with no
improvement in revenues/ restaurant, which is doable because CMG is opening a greater
number of restaurants every year and they have higher volumes than they used to.
Operating margin expansion:17.5% to 19%. Current restaurant-level margins: 27.2%
WACC: 7.12% moving to 8% in year 10
**Beta used 0.85 going to 1 in year 10 (* actual estimate is 0.43 and sector median is 0.5!!!)
Valuation 15-year DCF Base 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Growth in Revenue 16.00% 16.00% 16.00% 16.00% 16.00% 14.70% 13.40% 12.10% 10.80% 9.50% 8.20% 6.90% 5.60% 4.30% 3.00%
Growth in Deprec'n 12.00% 12.00% 12.00% 12.00% 12.00% 11.10% 10.20% 9.30% 8.40% 7.50% 6.60% 5.70% 4.80% 3.90% 3.00%
Revenues 4,108,269$ 4,765,592$ 5,528,087$ 6,412,581$ 7,438,594$ 8,628,769$ 9,897,197$ 11,223,422$ 12,581,456$ 13,940,253$ 15,264,577$ 16,516,273$ 17,655,895$ 18,644,626$ 19,446,345$ 20,029,735$
COGS
% of Revenues 82.70% 82.56% 82.42% 82.28% 82.14% 82.00% 81.80% 81.60% 81.40% 81.20% 81.00% 81.00% 81.00% 81.00% 81.00% 81.00%
- $ COGS 3,397,469$ 3,934,408$ 4,556,193$ 5,276,228$ 6,110,036$ 7,075,590$ 8,095,908$ 9,158,312$ 10,241,305$ 11,319,486$ 12,364,308$ 13,378,181$ 14,301,275$ 15,102,147$ 15,751,539$ 16,224,085$
EBIT 710,800$ 831,184$ 971,894$ 1,136,353$ 1,328,558$ 1,553,178$ 1,801,290$ 2,065,110$ 2,340,151$ 2,620,768$ 2,900,270$ 3,138,092$ 3,354,620$ 3,542,479$ 3,694,805$ 3,805,650$
Tax Rate 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00%
EBIT (1-t) 440,696$ 515,334$ 602,574$ 704,539$ 823,706$ 962,971$ 1,116,800$ 1,280,368$ 1,450,894$ 1,624,876$ 1,798,167$ 1,945,617$ 2,079,864$ 2,196,337$ 2,290,779$ 2,359,503$
+ Depreciation 110,000$ 123,200$ 137,984$ 154,542$ 173,087$ 193,858$ 215,376$ 237,344$ 259,417$ 281,208$ 302,299$ 322,250$ 340,619$ 356,968$ 370,890$ 382,017$
- Capital Expenditures 225,000$ 252,000$ 282,240$ 316,109$ 354,042$ 396,527$ 380,704$ 364,882$ 349,059$ 333,236$ 317,414$ 338,363$ 357,650$ 374,817$ 389,435$ 401,118$
- Change in WC 160,000$ 86,767$ 100,649$ 116,753$ 135,434$ 157,103$ 167,433$ 175,062$ 179,260$ 179,361$ 174,811$ 165,224$ 150,430$ 130,512$ 105,827$ 77,008$
= FCFF 165,696$ 299,767$ 357,669$ 426,219$ 507,318$ 603,198$ 784,039$ 977,769$ 1,181,991$ 1,393,486$ 1,608,241$ 1,764,281$ 1,912,403$ 2,047,976$ 2,166,408$ 2,263,394$
Terminal Value (in '05) 46,625,925$
COSTS OF EQUITY AND CAPITAL
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Cost of Equity 7.12% 7.12% 7.12% 7.12% 7.12% 7.29% 7.47% 7.65% 7.82% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
Proportion of Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
After-tax Cost of Debt 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41%
Proportion of Debt 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Cost of Capital 7.12% 7.12% 7.12% 7.12% 7.12% 7.29% 7.47% 7.65% 7.82% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
Cumulative WACC 107.12% 114.74% 122.90% 131.64% 141.01% 151.29% 162.59% 175.02% 188.72% 203.81% 220.12% 237.73% 256.75% 277.29% 299.47%
Present Value 279,856$ 311,731$ 346,802$ 385,371$ 427,768$ 518,225$ 601,360$ 675,327$ 738,400$ 789,071$ 801,510$ 804,446$ 797,661$ 781,286$ 16,325,261$
FIRM VALUATION
Value of Firm 24,584,075$
+ Cash and marketable securities = 1,225,000$
- Value of Debt -$
Value of Equity 25,809,075$
- Value of Equity options issued by firm 595,000$
Value of Equity per Share 800.14$
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Value of firm by year 24,584,075$ 26,033,465$ 27,528,077$ 29,060,481$ 30,620,817$ 32,196,290$ 33,760,005$ 35,303,771$ 36,821,106$ 38,308,135$
$ Value of Debt -$ -$ -$ -$ -$ -$ -$ -$ -$ -$
Value of Shares 865.02 912.45 961.08 1,010.59 1,060.59 1,110.21 1,159.20 1,207.35 1,254.54
Valuation 15-Year DCF Present Value Sensitivity
High growth vs. Terminal Growth
800.14$ 14.0% 15.0% 16.0% 17.0% 18.0%
2.0% $599.80 $645.29 $694.13 $746.56 $802.82
2.5% $640.54 $689.62 $742.35 $798.96 $859.73
3.0% $689.38 $742.77 $800.14 $861.77 $927.95
3.5% $749.00 $807.66 $870.71 $938.47 $1,011.25
4.0% $823.47 $888.70 $958.85 $1,034.27 $1,115.30
High growth vs. mature Operating Margin with 3% terminal
$800.1 14.0% 15.0% 16.0% 17.0% 18.0%
17.0% $624.10 $671.89 $723.23 $778.36 $837.53
18.0% $656.74 $707.33 $761.69 $820.06 $882.74
19.0% $689.38 $742.77 $800.14 $861.77 $927.95
20.0% $722.01 $778.21 $838.60 $903.48 $973.16
21.0% $754.65 $813.64 $877.05 $945.19 $1,018.37
Valuation 15-Year DCF 1-Year Price Target
High growth vs. Terminal Growth
865.02 14.0% 15.0% 16.0% 17.0% 18.0%
2.0% $650.36 $699.12 $751.47 $807.66 $867.95
2.5% $694.00 $746.61 $803.11 $863.78 $928.90
3.0% $746.31 $803.53 $865.02 $931.06 $1,001.98
3.5% $810.18 $873.04 $940.61 $1,013.22 $1,091.21
4.0% $889.95 $959.85 $1,035.02 $1,115.83 $1,202.66
High growth vs. mature Operating Margin with 3% terminal
865.02 14.0% 15.0% 16.0% 17.0% 18.0%
17.0% $676.39 $727.61 $782.63 $841.72 $905.13
18.0% $711.35 $765.57 $823.83 $886.39 $953.56
19.0% $746.31 $803.53 $865.02 $931.06 $1,001.98
20.0% $781.27 $841.49 $906.21 $975.74 $1,050.41
21.0% $816.23 $879.45 $947.40 $1,020.41 $1,098.83
Some More Quotations
"Taco Bell has started to eat Chipotle's lunch"
David Einhorn, 10/2/12
- since then CMG + 130%
I think its a great time to short it though. Im actually looking at a $380 price. It
might get there today, I dont know, but it hasnt gotten there recently. Thats
like the perfect price to short it at, and at that price I think Ill come in and do it.
-- Jeff Gundlach, 5/20/2013
-- since then CMG + 77%
Current Pessimism
Can they Top Last Years Performance?
- record comps tough to beat
Food Inflation
- High beef, dairy, and avocado inflation lead to food costs at ~ 35%
of costs, up from 33%
Looks Expensive
Optimistic Surprises?
History of Conservative Guidance
Investments in people to pay off?
- More Field Leaders per restaurant now than ever before even better performance?
Despite insane comps, room for improvement?
- currently the top-performing CMGs are 3 times faster at peak times than the average store.
If food inflation moderates:
- margins could expand with no price increase
US Economic Tailwinds - Lower gas prices,
improving economy, no ill-effect from strong $
Chipotle Mexican Grill (CMG)
Recommendation: BUY
Billy Duberstein
March 12, 2015
This report is published for informational purposes only by students of the Michael Price Student Investment Fund, a
student-run organization the Leonard N. Stern School of Business at New York University.
Current Price: $660
Present Value est.: $800
Upside: 21%
1-year Price Target: $865
Upside: 31%