Professional Documents
Culture Documents
1
(1+
1
(
)(1+
)
1
1
=1
Equity Value = BVE
0
+
(1+
1
+
1
(
)(1+
)
1
1
=1
Current Stock Price-
$363.19 per share, April
30
th
Stock Price from DCF and
RIM- $388.01 per share
Stock price from P/E
multiples- $200 per share
by Yum and $165.31 per
share by Brinker
Stock price from P/B
multiples- $556.73 per share
by Yum and $469.70 per
share by Brinker
FCFE1 2013 2014 2015 2016 2017 2018 2019 2020
Net Income 338.74 383.71 428.28 466.28 496.99 518.65 530.82 554.18
Less: Increase in Equity (191.8) (176.0) (171.5) (110.8) (96.8) (20.7) (3.6) (88.8)
FCFE 146.9 207.7 256.8 355.5 400.2 498.0 527.2 465.4
Perpetuity with growth 17,302.0
Payof f s 146.9 207.7 256.8 355.5 400.2 498.0 17,829.3
PV Factor 0.9338 0.8720 0.8142 0.7603 0.7100 0.6630 0.6191
PV of Payof f s 137.2 181.1 209.1 270.3 284.1 330.1 11,038.0
Calculation of Equity Value
Equity Value at B/S Date 12,450.0
Partial Year Adjustment 102.2%
Equity Value at Valuation Date 12,728.7
Shares Outstanding 32.8
Value per Share $388.01
FCFE2 2013 2014 2015 2016 2017 2018 2019 2020
CFO 494.0 520.6 574.9 618.4 653.9 678.7 693.2 718.0
CFI (315.6) (293.9) (300.2) (249.0) (244.0) (176.0) (166.1) (242.4)
Increase (Decrease) in Net Debt 30.9 36.9 38.9 36.8 34.0 29.6 24.5 18.5
(Increase) Decrease in WCCash (62.3) (55.9) (56.8) (50.6) (43.6) (34.4) (24.5) (28.6)
FCFE 146.9 207.7 256.8 355.5 400.2 498.0 527.2 465.4
Perpetuity with growth 17,302.0
Payof f s 146.9 207.7 256.8 355.5 400.2 498.0 17,829.3
PV Factor 0.9338 0.8720 0.8142 0.7603 0.7100 0.6630 0.6191
PV of Payof f s 137.2 181.1 209.1 270.3 284.1 330.1 11,038.0
Calculation of Equity Value
PV FCFE 12,450.0
Partial Year Adjustment 102.2%
Equity Value at Valuation Date 12,728.7
Shares Outstanding 32.8
Value per Share $388.01
14
Sensitivity Analysis
Our valuation of Chipotles stock value is based on the assumptions
of 4.4% terminal growth rate and 7.09% opportunity cost of capital.
Our final estimate of value is quite sensitive to these two assumptions.
As the data table shows, if the opportunity cost of capital is held
constant, the estimate of value will drop below the current stock price
($362), when the terminal growth rate drops below 3.8%. The value
is very sensitive to the terminal growth rate is because we only
forecast income statement and balance sheet up to year 2020, which
only contribute about 14% of value to the total value estimate. Around
86% of stock value comes from the infinite year after 2020. Therefore,
when the terminal growth rate changes a little, the total stock value
changes a lot. If the terminal growth rate keeps constant, the stock
$387.09 3.50% 3.80% 4.10% 4.40% 4.70% 5.00% 5.30%
5.50% 576.99 664.55 790.46 986.98 1,336.63 2,132.64 5,738.09
6.00% 457.86 509.08 576.72 670.22 807.9 1,030.73 1,453.11
6.50% 378.87 411.85 453.19 506.5 577.88 678.4 830.47
7.00% 322.67 345.32 372.7 406.48 449.19 504.91 580.64
7.50% 280.64 296.93 316.11 339.05 366.96 401.64 445.92
8.00% 248.03 260.15 274.16 290.51 309.87 333.14 361.64
8.50% 221.99 231.27 241.81 253.91 267.93 284.38 303.94
Terminal Growth
C
o
s
t
o
f
E
q
u
i
t
y
RIM 1 2013 2014 2015 2016 2017 2018 2019 2020
Beg. Book Value of Equity (BE) 1,245.9 1,437.8 1,613.8 1,785.3 1,896.0 1,992.8 2,013.5 2,017.1
Cost of Equity - r 7.09% 7.09% 7.09% 7.09% 7.09% 7.09% 7.09% 7.09%
r x BE 88.3 101.9 114.4 126.6 134.4 141.3 142.8 143.0
Net Income 338.7 383.7 428.3 466.3 497.0 518.6 530.8 554.2
r x BE (88.3) (101.9) (114.4) (126.6) (134.4) (141.3) (142.8) (143.0)
Residual Income (RI) 250.4 281.8 313.9 339.7 362.6 377.4 388.1 411.2
Perpetuity with growth 15,284.9
Payof f s 250.4 281.8 313.9 339.7 362.6 377.4 15,673.0
PV Factor 0.9338 0.8720 0.8142 0.7603 0.7100 0.6630 0.6191
PV of Payof f s 233.8 245.7 255.6 258.3 257.4 250.2 9,703.1
Calculation of Equity Value
Beg BE 1,245.9
PV RI 11,204.0
Equity Value - B/S Date 12,450.0
Partial Year Adjustment 102.2%
Equity Value at Valuation Date 12,728.7
Shares Outstanding 32.8
Value per Share $388.01
RIM 2 2013 2014 2015 2016 2017 2018 2019 2020
Net Income 338.7 383.7 428.3 466.3 497.0 518.6 530.8 554.2
Beg. BE 1,245.9 1,437.8 1,613.8 1,785.3 1,896.0 1,992.8 2,013.5 2,017.1
ROE 27.19% 26.69% 26.54% 26.12% 26.21% 26.03% 26.36% 27.47%
Cost of Equity 7.09% 7.09% 7.09% 7.09% 7.09% 7.09% 7.09% 7.09%
AROE 20.10% 19.60% 19.45% 19.03% 19.12% 18.94% 19.27% 20.38%
Weight: BE 1,245.9 1,437.8 1,613.8 1,785.3 1,896.0 1,992.8 2,013.5 2,017.1
Residual Income 250.4 281.8 313.9 339.7 362.6 377.4 388.1 411.2
Perpetuity with growth 15,284.9
Payof f s 250.4 281.8 313.9 339.7 362.6 377.4 15,673.0
PV Factor 0.9338 0.8720 0.8142 0.7603 0.7100 0.6630 0.6191
PV of Payof f s 233.8 245.7 255.6 258.3 257.4 250.2 9,703.1
Calculation of Equity Value
Beg BE 1,245.9
PV RIM 11,204.0
Equity Value - B/S Date 12,450.0
Partial Year Adjustment 102.2%
Equity Value at Valuation Date 12,728.7
Shares Outstanding 32.8
Value per Share $388.01
The values estimated are very
sensitive to the assumptions
about the terminal growth rate
and the cost of equity.
15
value will drop below price when the cost of equity increases to 7.5%. At 4.4% terminal growth rate, the estimate of stock
value will only be $253.91 when the cost of equity equals 8.5%. The future cost of equity can easily increase to or above
8.5% because it only requires the beta to go above 1.1. The current beta we are using is 0.87, but the historical beta,
calculated with the recent 1-year daily stock prices, is 1.41, which will make the cost of equity equal to 10.3% and make
the stock value estimate equal to $172.
Recommendation
Short-Term Buy, Long-Term Hold
Current Price: $368.18 Target Price: $388.01 Horizon: ST-1m, LT-6m
Why buy now?
1. Chipotle has exhibited a strong trend of revenue growth in the recent 5 years. The average revenue growth rate in the
past 3 years is about 20% per year. The number of restaurants will still be increasing fast for several years in the future because
they have started to expand into the international market.
2. The business model of Chipotle is pretty straightforward. They conduct business with customers on a cash basis.
3. According to our earnings quality analysis, the risk of Chipotle being a manipulator is low. Chipotles TATA ratio has
been negative for the recent 5 years, which means that they have enough cash flows from operations backing up their earnings.
4. According to our research, the demand of Mexico food will keep increasing in the future because of the increase in
immigration.
5. Chipotles capital structure, currently, is 100% equity. There is a great potential that Chipotle will issue some debt in
the future. The financial leverage will increase the equity value by decreasing the weighted average cost of capital.
6. According to our forecast, Chipotles Asset Turnover ratio is high now, and it will get higher in the future, which
means that Chipotles fixed cost is low. Therefore, the risk from operational leverage is low.
7. Chipotle has a large cash balance and a strong anticipated operational cash stream in the future, so they will be able
to expand their business through acquisitions or by investing more in advertising.
Risk
1. One of the major risks of business that Chipotle may possibly face in the future is inflation. The cost of good sold is
around 63% now. The management forecasts the ratio will be likely to increase in the future due to the inflation. However, the
management is not planning to increase the menu price to keep the profit margin stable.
2. Since Chipotle has been advertising the food they offer as healthy food with good quality ingredients, the quality
control of the ingredients becomes another potential risk that will have an effect on the revenue.
Valuation
8 yr DCF and RIM models estimate a valuation for Chipotles share of $388.01. We employed a cost of equity of
7.09% and a terminal year growth rate of 4.4%.
Our multiple based valuation using price to earnings is in the range of $165-$200 per share. And multiple based
valuation using price to book value is in the range of $469-$557 per share.
Our price target of $388.01 per share and the above analysis indicates that the current stock price will keep rising in
the short-run.
16
Balance Sheet 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
ASSETS
Current Assets
Cash and Cash Equivalents 225 401 323 385 441 498 548 592 626 651 679
Short Term Investments 125 55 150 181 209 238 264 288 307 322 336
Accounts Receivable 6 8 17 17 19 22 25 28 30 32 33
Inventory 7 9 11 17 19 22 25 28 30 32 33
Prepaid Expenses 16 21 27 33 39 45 50 55 60 64 66
Current Deferred Tax Asset 4 6 9 7 8 9 10 11 12 13 13
Income Tax Receivable 24 - 10 - - - - - - - -
Total Current Assets 406 501 547 639 735 834 923 1,001 1,065 1,113 1,162
Non-Current Assets
Gross Property, Plant & Equipment 982 1,122 1,312 1,522 1,740 1,968 2,159 2,358 2,504 2,655 2,772
Accumulated Depreciation (305) (370) (445) (537) (643) (766) (904) (1,056) (1,220) (1,395) (1,456)
Net Property, Plant & Equipment 677 752 867 985 1,096 1,202 1,255 1,302 1,284 1,261 1,316
Long-term Investments -
Goodwill - 128 191 233 272 313 352 388 419 445 465
Other Long-term Assets 22 22 22 33 39 45 50 55 60 64 66
Total Non-Current Assets 715 924 1,124 1,317 1,484 1,649 1,757 1,856 1,883 1,897 1,980
Total Assets 1,122 1,425 1,669 1,956 2,219 2,483 2,680 2,857 2,948 3,010 3,142
LIABILITIES
Current Liabilities
Accounts Payable 34 46 59 66 78 89 101 111 120 127 133
Accrued Exp. 76 89 105 133 155 179 201 222 240 255 266
Curr. Port. Of Long Term Debt - - - - - - - - - - -
Curr. Port. of Cap. Leases 0 0 0 - - - - - - - -
Curr. Income Taxes Payable - 4 - - - - - - - - -
Unearned Revenue, Current 13 18 23 33 39 45 50 55 60 64 66
Total Current Liabilities 123 157 187 233 272 313 352 388 419 445 465
Non-Current Liabilities
Long Term Debt - - - - - - - - - - -
Capital Leases 4 4 3 3 4 4 5 6 6 6 7
Def. Tax Liability, Non-Curr. 51 64 49 66 78 89 101 111 120 127 133
Other Non-Current Liabilities 133 156 184 216 252 291 327 360 389 414 432
Total Non-Current Liabilities 188 224 236 286 334 384 432 477 515 547 571
Total Liabilities 311 381 423 518 605 697 784 865 935 993 1,036
SHAREHOLDER'S EQUITY
Total Equity 811 1,044 1,246 1,438 1,614 1,785 1,896 1,993 2,014 2,017 2,106
Total Liabilities + Shareholder's Equity 1,122 1,425 1,669 1,956 2,219 2,483 2,680 2,857 2,948 3,010 3,142
Income Statement 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenues 1,836 2,270
2,731
3,323 3,881 4,471 5,028 5,543 5,992 6,363 6,643
Total Cost of Goods Sold (1,144) (1,429) (1,704) (2,093) (2,465) (2,861) (3,243) (3,603) (3,925) (4,200) (4,385)
General and Administrative Expenses (119) (149) (183) (216) (252) (291) (327) (360) (389) (414) (432)
Depreciation and Amortization (69) (75) (84) (92) (107) (123) (138) (152) (164) (175) (182)
Pre-opening Costs (8) (8) (12) (13) (16) (18) (20) (22) (24) (25) (27)
Other Operating Costs (203) (251) (287) (366) (427) (492) (553) (610) (659) (700) (731)
Operating Income (EBIT) 294 356 461 543 615 686 747 796 831 850 887
Gain (loss) on sale and disposal of assets (6) (6) (5) - - - - - - - -
Interest Income 1 - 2 3 4 4 5 6 6 6 7
Interest Expense - (1) - - - - - - - - -
Earnings before Taxes (EBT) 289 350 458 546 619 691 752 802 837 856 894
Provision for Income Taxes (110) (135) (180) (208) (235) (262) (286) (305) (318) (325) (340)
Net income 179 215 278 339 384 428 466 497 519 531 554
17
Cash Flow Statement 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Operating Section
Net Income 179 215 278 339 384 428 466 497 519 531 554
Depreciation and Amortization 69 75 84 91 99 107 114 122 129 137 145
Accounts Receivable (1) (3) (8) 0 (3) (3) (3) (3) (2) (2) (1)
Inventories (1) (2) (2) (6) (3) (3) (3) (3) (2) (2) (1)
Deferred Income Taxes 10 12 (18) 20 10 11 10 9 8 7 5
Prepaid Expenses (2) (5) (6) (6) (6) (6) (6) (5) (4) (4) (3)
Income Tax Receivable (24) 24 (10) 10 - - - - - - -
Accounts Payable 8 13 12 8 11 12 11 10 9 7 6
Accrued Expenses 12 13 17 28 22 24 22 21 18 15 11
Unearned Revenue 4 5 5 10 6 6 6 5 4 4 3
Curr. Port. of Cap. Leases 0 0 0 (0) - - - - - - -
Curr. Income Taxes Payable (4) 4 (4) - - - - - - - -
Cash Flow From Operations 252 350 347 494 521 575 618 654 679 693 718
Investing Section
Short Term Investments (75) 70 (95) (30) (28) (29) (26) (24) (20) (15) (14)
Long-Term Investments - (128) (63) (42) (39) (41) (39) (36) (31) (26) (20)
Property, Plant and Equipment (net) (109) (150) (199) (210) (210) (212) (167) (169) (112) (114) (200)
Goodwill - - - (11) (6) (6) (6) (5) (4) (4) (3)
Other Long-term Assets (11) (5) (21) (24) (11) (12) (11) (10) (9) (7) (6)
Cash Flow From Investing Activities (195) (214) (377) (317) (294) (300) (249) (244) (176) (166) (242)
Financing Section
Capital Leases (0) (0) (0) (0) 1 1 1 1 0 0 0
Other non-current liabilities 20 22 28 32 36 38 36 33 29 24 18
Shareholder's Equity (72) 18 (76) (147) (208) (257) (356) (400) (498) (527) (465)
Cash Flow From Financing Activities (51) 41 (49) (115) (171) (218) (319) (366) (468) (503) (447)
Net Change 5 176 (79) 62 56 57 51 44 34 24 29
Beginning Cash 220 225 401 323 385 441 498 548 592 626 651
Ending Cash, per Cash Flow Statement 225 401 323 385 441 498 548 592 626 651 679
Ending Cash, per Balance Sheet 225 401 323 385 441 498 548 592 626 651 679
ROE #1 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
ROE = CEL x CSL x ROA 13% 19% 24% 23% 24% 25% 25% 25% 25% 26% 26% 26% 27%
CEL 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
CSL 1.31 1.35 1.38 1.37 1.35 1.35 1.37 1.38 1.40 1.42 1.45 1.48 1.49
ROA = PM x ATO 10% 14% 17% 17% 18% 19% 18% 18% 18% 18% 18% 18% 18%
PM 6% 8% 10% 9% 10% 10% 10% 10% 9% 9% 9% 8% 8%
ATO 1.7 1.7 1.8 1.8 1.8 1.8 1.9 1.9 1.9 2.0 2.1 2.1 2.2
ROE #2 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
ROE = RONA + D/E x SPREAD 13% 19% 24% 23% 24% 25% 25% 25% 25% 26% 26% 26% 27%
RONA = PM x ATO 13% 19% 24% 23% 24% 25% 25% 25% 25% 25% 26% 26% 27%
PM 6% 8% 10% 9% 10% 10% 10% 10% 9% 9% 9% 8% 8%
ATO for RONA 2.2 2.3 2.4 2.4 2.4 2.5 2.5 2.6 2.7 2.8 3.0 3.1 3.2
FLEV (D/E) 0.01 0.01 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
SPREAD = RONA - EIR 9% 13% 24% 9% 24% 25% 25% 25% 25% 25% 26% 26% 27%
RONA 13% 19% 24% 23% 24% 25% 25% 25% 25% 25% 26% 26% 27%
EIR 0.0 0.1 - 0.1 - - - - - - - - -
18
PM Decomposition 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenues 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Total Cost of Goods Sold -62% -63% -62% -63% -64% -64% -65% -65% -66% -66% -66%
General and Administrative Expenses -6% -7% -7% -7% -7% -7% -7% -7% -7% -7% -7%
Depreciation and Amortization -4% -3% -3% -3% -3% -3% -3% -3% -3% -3% -3%
Pre-opening Costs 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Other Operating Costs -11% -11% -10% -11% -11% -11% -11% -11% -11% -11% -11%
Gain (loss) on sale and disposal of assets 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Interest Income 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Provision for Income Taxes -6% -6% -7% -6% -6% -6% -6% -5% -5% -5% -5%
Profit Margin 10% 9% 10% 10% 10% 10% 9% 9% 9% 8% 8%
ATO Decomposition 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Accounts Receivable Turnover 352.4 323.1 216.9 198.9 215.5 214.1 211.7 209.7 207.8 206.0 204.3
Days Receivables Outstanding 1.0 1.1 1.7 1.8 1.7 1.7 1.7 1.7 1.8 1.8 1.8
Inventory Turnover - Sales 288.8 283.5 273.0 239.8 215.5 214.1 211.7 209.7 207.8 206.0 204.3
Inventory Turnover - COGS 179.9 178.5 170.4 151.1 136.8 137.0 136.6 136.3 136.1 136.0 134.8
Days Inventory on Hand 2.0 2.0 2.1 2.4 2.7 2.7 2.7 2.7 2.7 2.7 2.7
Fixed Assets Turnover - Total Sales 2.8 3.2 3.4 3.6 3.7 3.9 4.1 4.3 4.6 5.0 5.2
Total Asset Turnover 1.8 1.8 1.8 1.8 1.9 1.9 1.9 2.0 2.1 2.1 2.2
Liquidity Analysis 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Current Ratio 3.3 3.2 2.9 2.7 2.7 2.7 2.6 2.6 2.5 2.5 2.5
Quick Ratio 2.9 3.0 2.6 2.5 2.5 2.4 2.4 2.3 2.3 2.3 2.3
Adjusted Quick Ratio 2.0 2.2 1.9 2.1 1.9 1.8 1.8 1.7 1.6 1.6 1.5
Days to Sell Inventory 2.0 2.0 2.1 2.4 2.7 2.7 2.7 2.7 2.7 2.7 2.7
Days to Collect Accounts Receivable 1.0 1.1 1.7 1.8 1.7 1.7 1.7 1.7 1.8 1.8 1.8
Days to Pay Accounts Payable 9.4 10.2 11.2 10.9 10.7 10.6 10.7 10.7 10.7 10.7 10.8
Cash Conversion Cycle -6.3 -7.0 -7.4 -6.6 -6.3 -6.3 -6.3 -6.3 -6.3 -6.3 -6.3
Solvency Analysis 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Debt/Equity 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Interest Coverage Ratio - Income 2891 409 4577 5464 6189 6908 7521 8016 8365 8562 8938
Interest Coverage Ratio - CFO 3618 566 5270 7016 7558 8374 9042 9585 9966 10186 10576
CFO/CAPEX 2.3 2.3 1.7 2.4 2.5 2.7 3.7 3.9 6.1 6.1 3.6
Valuation Assumptions
Risk-free Rate 1.85%
Equity Risk Premium 6.00%
Beta (Adjusted) 0.87
Cost of Equity 7.09%
Terminal Growth 4.40%
Capitalization Rate 2.69%
Valuation Date 4/30/2013
B/S Date 12/31/2012
Days Since 118
Portion of year elapsed 0.3233
Partial Year Adjustment 102.24%
Shares Outstanding 32.81