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Module 3: market Multiples Company: chipotle

Module 3: market Multiples Company: chipotle. Matt Ramirez. Chipotle background. Mexican grill that focuses on serving quality food while maintaining speed and efficiency Found in 1993 by Steve Ells in Denver, Colorado

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Module 3: market Multiples Company: chipotle

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  1. Module 3: market MultiplesCompany: 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. Market Multiple valuation

  4. Performance measures • NEA- enterprise (no leverage) • EPAT- enterprise (no leverage) • Sales- considered enterprise (driver of value) • EBITDA (Industry-specific multiple) • No equity measures used (leverage effects)

  5. Comparable companies • Panera Bread Co. • Einstein-Noah Bagels • Starbucks

  6. Equity value & enterprise value (before multiples analysis)

  7. General data Note: Due to Chipotle containing a net financial assets total (rather than NFL), NFA was added to enterprise value in computation of equity value through the following multiples analysis

  8. NEA

  9. epat

  10. sales

  11. FCF (not used due to multiple discrepancy)

  12. Ebitda (industry-specific)

  13. Reasons for using ebitda • EBITDA focuses on profitability, which is important in a high-competition and high-growth restaurant environment in focus to stay relevant • Specialty eateries/restaurants are mostly composed of tangible items (no R&D, etc.)- EBITDA helps analyze efficiency of company operations (without non-operational items) and how resources are put to use compared to other companies • Depreciation & amortization methods/policies do not have an effect: more transparency (especially useful to compare to the much larger Starbucks) • Commonly used in the restaurant industry

  14. Combined estimates

  15. recommendation

  16. Confidence in valuation • Little confidence- many inherent problems using market multiples method • Market multiple valuation is a “rough” screening method for stocks and lacks theoretical foundation • Performance measures: no single measure can summarize performance, which measure is more important? were correct measures chosen? Are measures stable? • Comparable companies: how “comparable” are these 4 companies? Differ in profitability, expected growth, and risk (especially Starbucks)

  17. Confidence in Valuation (continued) • Reliance on other companies’ values/multiples as a basis for target company’s value (other companies can be unfairly valued, each company has unique features such as cost structure, etc.) • Use of method of comparables (e.g. equal-weighted average, value-weighted average, median) • Differing year-end dates? (Starbucks 9/29, Chipotle 12/31) • Discrepancy among multiples (e.g. NEA & FCF)

  18. Confidence in valuation (continued) • Heavy difference between market price ($492.48) and computed value ($164.27-$279.33) (around 70% difference): Why is market price so much higher? Errors? • Averages and different combinations: almost 17% difference when using all 4 multiples and only EPAT/EBITDA- large range from multiples, etc. • Where is this “extra” value?

  19. conclusion • Little confidence in the computed valuations • A more in-depth and stronger foundational method of valuation should be used • The method of comparables/market multiples contains too many inherent errors and issues to be considered acceptable in company valuation

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