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Author: ehudmos One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 434  
Subject: chipotle valuation Date: 6/9/2006 4:38 AM
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I've attempted a thumbnail valuation of Chipotle.

               02    03    04    05    06
New Stores     57    76    104   80    80-90 (expected)
Comp. Growth   17%   24%   13%   9%    19%   (so far)

Chipotle expects to build 80-90 new stores in addition to the 80 they 
constructed last year.  We'll conservatively assume 90 new stores and 
raise capex by a factor of 90/80 to 93. Depreciation is rising at a 
decelerating rate every year (28% and 45% for '05 and '04 respectively) 
as new stores are added, so it would be safe to keep depreciation the 
same as last year.  I think it's ok to say that investors would be 
willing to pay a p/oe 30% higher than five-year growth rates, as 
Chipotle currently trades at a 44% p/e premium to its expected 
five-year, and McDonald's p/e of 17 stands at a 42% premium to their 
trailing 5-year growth of 12%.

(Everything in millions)

D&A           28
Capex         93
%Maint. Capex 25%

Growth Prem. 30%
Cash         133.46
Debt         0
Shares       32.45
Dil. Rate    2%

The tricky part is guessing net income for 2006.

Net Income

2003  Q1     Q2     Q3     Q4     Total 
      (3.9)  (0.5)  0.3    (3.5)  (7.6)

2003  Q1     Q2     Q3     Q4     Total 
      0.5    5.0    4.3    (3.7)  15.9

2005  Q1     Q2     Q3     Q4     Total
      2.6    25.7   5.1    4.3    37.7

2006  Q1
      8.0

The company's earnings are tremendously cyclical, with the first quarter historically being the worst.

This year, first-quarter earnings increased three times, in part due to 
additional revenue from new openings ($24.7) and increased same-store 
sales ($26.1), better pricing, and a weak first quarter last year.  
We'll set the upside for 2006's profits for three times 2005 profits, or 
$113M.

For the downside, let's assume CMG that this year CMG's three weak 
quarters will be no better than the weakest quarter, and make $8M the 
average of the three weak quarters.  Also we'll assume no growth for Q3. 
Under this scenario, net income for 2006 would be no more than $50M.

I'm going to work with my buy-in price of $59.50 per share since the 
company now trades for slightly less.

Management as well as analysts expect 25% earnings growth for the next 
five years. 

Expected annual compounded return based earnings growth rates and net 
income:

       $50M     $55M    $60M    $65M    $70M
21%    13%      15%     %17     19%     21% 
23%    13%      19%     %21     23%     25%
25%    17%      23%     %25     27%     29%
27%    20%      27%     %29     31%     33%
29%    24%      31%     %33     35%     37%

In short, this sounds too good.  I haven't been as thorough with my DCF 
models, and they are also fairly positive:  

1-5 year growth  25%
6-10 year growth 15%
Terminal growth  5%
Discount rate    12%

Net Income        50    55    60    65    70
Owner's earnings  55    60    65    70    75
Intrinsic Value   78    80    92    99    106
Market Discount   24%   30%   35%   40%   44%

Maybe someone will correct me somewhere, but otherwise I'm happy to be 
investing in Chipotle.
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