Module 5: Discounted Cash Flow Valuation Company: chipotle

1. Module 5: Discounted Cash Flow ValuationCompany: chipotle Matt Ramirez

2. Chipotle background • Mexican grill that focuses on serving quality food while maintaining speed and efficiency • Found in 1993 by Steve Ells in Denver, Colorado • Considered a “fast-casual” restaurant: food that is served fast without the “fast food” methods or ambiance, allows customers to eat “on the go” or in a nicer restaurant environment • Not franchised, centrally-owned

3. Data analysis

4. RNEA • RNEA= EPAT/avg NEA • RNEA=(EPAT/sales) x (sales/avg NEA) • RNEA= EPM x EATO

5. EPm

6. Epm from sales

7. Epm explanation • EPM/EPM from sales stable (roughly 10%) • Chipotle seems to efficiently control costs/pricing at all levels • EPM from Sales: eliminates foreign currency translation & loss on disposal of assets (impossible to accurately forecast these values)

8. eato

9. Eato explanation • Chipotle is average to its comparable companies (roughly 3-4%) • Chipotle’s enterprise assets are productive and generate 3-4 times sales per each $1 of assets • Relatively stable throughout time for Chipotle & its comparables

10. Sales growth

11. forecasting

12. Factors to consider • Starbucks is much larger than Chipotle & Panera • Einstein Noah is much smaller than the other 3 comparables • Starbucks is not as “pure-play” as Chipotle/Panera (coffee and well as fast-casual food)

13. Information needed to forecast • 1) Forecasted sales growth rates determines forecasted revenues (*most difficult & important estimate) • 2) Forecasted EPM/EPM from sales determines forecasted EPAT • 3) Forecasted EATO determines forecasted NEA

14. Forecasting assumptions

15. Sales growth assumption • Comparable companies not a significant factor in assumption: different & unsteady growth years (Panera/Starbucks), Einstein’s small growth, Starbucks’ size • Significant decrease from 2011 to 2013 (6%): only relevant to use 2013 as historical figure • Analyst estimates: consensus estimates for 2014 & 2015 • Growth will slow, but will “even out” for next 5 years

16. Epm assumption • EPM from sales used: more stable & accurate forecasting measure • Growth varies between years & comparable companies: average taken to smooth number • Starbucks: abnormal growth from 2012 to 2013? (not factored into decision) • Only 2012 & 2013 used: less discrepancy between numbers

17. Eato assumption • Regular EATO used: relatively stable for all 4 companies throughout past years • Starbucks/Panera used as influences: also stable and roughly 3-4 • Average of 2013, 2012, & 2011: Average gives more accurate estimate due to the varied decline/growth seen among Chipotle, Panera, and Starbucks

18. 5-year forecast

19. Discounted Cash flow valuation

20. Current enterprise value

21. Dcf assumptions • 10% cost of capital/required rate of return used: more information & analysis needed (subject to change) • FCF continuing/terminal growth rate: 4% used due to 16.79% sales growth not sustainable (subject to change)

22. Discounted Cash flow

23. Dcf enterprise value vs. current

24. DCF explanations • There is a significant difference between DCF enterprise value and current enterprise value: Possible over-valuation by the market, wrong growth rates used, etc. • More accurate WACC & continuing growth rates are needed for a better valuation • Possibility that higher terminal growth rate is needed or more years must be forecasted at a higher rate

25. Overall thoughts • Chipotle will continue to grow for some time: focused on maintaining growth, opening up new restaurants, and overall expansion • It is difficult to predict how big Chipotle will grow, when it will slow down, and for how long it will grow for • Forecasts are optimistic based on analyst estimates, current/past data: no signs of slowing down