Module 8: abnormal enterprise income growth model Company: chipotle

1. Module 8: abnormal enterprise income growth modelCompany: 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. forecasting

4. Forecast Assumptions

5. forecasts

6. Comments on forecasts • 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 to, 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

7. Wacc calculation

8. Wacc calculation • rent= (rd x Vd/Vent) + (req x Veq/Vent)

9. Bloomberg’s wacc (8.2%)

10. Wacc comments • Calculated WACC (6.82%) more than 1% lower than Bloomberg’s WACC (8.2%) • While Bloomberg is seemingly arbitrary in calculating values, it provides a decent benchmark or comparison to own calculated values • Overall, Bloomberg’s higher WACC results in much lower enterprise value compared to my own WACC

11. Dcf valuation

12. dcf valuation

13. Dcf valuation (bloombergwacc)

14. Residual income valuation

15. Residual income valuation

16. Residual income valuation (bloombergwacc)

17. Abnormal income growth valuation

18. Abnormal enterprise income growth model • Different accounting anchor employed than residual income: forecast of EPAT (versus current NEA) • Captures most value within the forecasting horizon (compared to DCF & RI models), but least amount of continuing value • Need a sufficient forecasting horizon to achieve “steady state” of growth to calculate reliable continuing value: abnormal income growth model takes one extra year due to agr calculation

19. Steady state requirements • 1) Sales growing at constant rate • 2) EPAT from each $1 of sales is constant • 3) NEA required for each $1 of sales is constant *Steady state has been achieved (sufficient forecasting horizon, seen on next slide)

20. Abnormal income growth valuation

21. Abnormal income growth valuation (bloombergwacc)

22. discussion

23. Residual income & dcf enterprise value (vs. market enterprise value)

24. Value estimates

25. Value estimates discussion • The AGR model captures 53% of Chipotle’s value within the horizon • Compared to other firms, 53% still seems low: significant amount of value still found in continuing value (beyond horizon) • Comfortable with AGR model due to its ability to capture most value within horizon: not confident with Chipotle’s continuing value at this point

26. Final comments • Residual income enterprise, DCF, and abnormal income growth enterprise values are the same: accounting choices do not matter over time (self-correcting) • Different growth value (4% terminal growth) used for 2019 onward: 16.79% growth is not sustainable (declines 2.558% per year until 2019) • 4% chosen due to expected future growth & analyst estimates • My calculated WACC (6.81%) is lower than other estimates (e.g. Bloomberg at 8.2%): different values- my WACC provides value more closely related to the market