Message Font: Serif | Sans-Serif
No. of Recommendations: 10
Here are some numbers that I worked up.

FY 2014

Revenue = $3,066M

This represents compounded growth for the next 5 years of 15.1%. I suspect that most of the growth will continue to come from new store openings and that mgmt will continue to have a conservative approach when it comes to expanding the store base. There will be some pricing increases but for the most part, I have modeled SSS as flat for the 5 year period. I have also modeled approximately 15% grow in new stores and estimate that there will be 1,860 CMG locations globally (I would suspect that approximately 25 of those locations will be in Europe and another 10 will be in Canada)

Restaurant margins = 23.5%

CMG's management has demonstrated that they know how to wring the most out of their stores. CMG continues to have strong margins at the restaurant level and based on mgm't's comments related to pricing power, I think that they are asute enough to stay ahead of most commodity and labor inflation that might take place over the next 5 years.

Net Margins = 7.75%

Q4 2009 the net margin clocked in at 8.4%. That is huge for the industry (in a Barclay's restaurant industry earnings preview report CMG's net margin was exceeded by only MCD and YUM in their estimates). I think that CMG's margins will start to creep down over the next few years but still remain near the top of the heap for the industry.

Average Shares Outstanding = 34.9M

I have estimated a 1.7% compounded diluation over the 5 year period as management seems to have a "shareholder" friendly approach to equity compensation and has shown that they are willing to use their cash to buyback shares when appropriate (last year's buyback was, in my opinion, the exact right way that a buyback program should work. Management was able to buy shares when they thought the price was "cheap")

Estimated EPS = $6.81/share

This estimate only represents a 11.5% compounded growth from 2009's actual but I think represents a fair estimate. The reason for higher revenue growth vs bottom line growth is found in the margins getting smaller (8.4% in 2009 vs. an estimate of 7.75% in 2014).

Valuation (I am using 18 February 2010 closing price of $103.98 in my calculations)

If we were to price the stock based on today's PEs we could see a share price between $179 - $192. Which would be a compounded growth of 11.5 to 13.1% for the share price (something I think we would all take if we could guarentee it). However I am not sure that if CMG's growth starts to decelerate over the course of the next 5 years, that they would continue to command PEs similar to today's. For example, I think a PE of 20x trailing 12 month earnings could be reasonable for a company whose EPS has grown 11.5% a year for the last 5 years. That kind of valuation puts the share price at approxiamtely $136/share or 5.5% compounded share price growth over the next 5 years. Not something to be ashamed of but not quite enought to clear my hurdle rate for a new investment idea. At today's prices, I too would not be buyer of CMG. I will continue to hold though despite the fact that CMG currently represents 18% of my stock portfolio. Another run to $110 and I would probably lighten my load on CMG hoping that I will get a chance to own more down the road at bargins similar to last year's (I made some purchases in the $40s and $50s last year).

What could go wrong....

Management fails to grow the new stores prudently and either is too conservative or too aggressive in their growth plans.

Unemployement remains close to a constant 10% during the 5 year period and consumer spending continues to shrink leading to negative traffic and average check amounts

Management fails to maintain their image as restaurant chain that supports "food with integrity" (see the latest posts on the public CMG board for some interesting feedback on CMG's tomotoe purchasing contract with East Coast Growers)

What could be better than I currently think ....

Management ramps up the new store growth beyond the 14% compounded rate that I have estimated. This would drive top line growth and have a positive impact on EPS. For example lets say new store growth approaches 20% by 2014 and CMG has 2,000 locations. I think that would translate to revenue of approximately $3,172M and EPS of $7.04/share.

Margin strength shown in 2009 continues and instead of falling margins rise and get closer to or exceed 9%. For perspective, if CMG were to achieve a net margin of 9% on estimated revenue, then EPS would jump to $7.91/share and share prices could be in the $205 to $225/share range that is significant!

I hope that this helps.

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.