Chipotle Mexican Grill (CMG)

Recommendation: BUY

Billy Duberstein

March 12, 2015

This report is published for informational purposes only by students of the Michael Price Student Investment Fund, a

student-run organization the Leonard N. Stern School of Business at New York University.

Current Price: $660

Present Value est.: $800

Upside: 21%

1-year Price Target: $865

Upside: 31%

A Video

Back to the Start

https://www.youtube.com/watch?v=aMfSGt6rHos

A Quotation

In addition, though marginal businesses purchased at cheap prices may be

attractive as short-term investments, they are the wrong foundation on which

to build a large and enduring enterprise. Selecting a marriage partner clearly

requires more demanding criteria than does dating. From my perspective,

though, Charlies most important architectural feat was the design of todays

Berkshire. The blueprint he gave me was simple: Forget what you know

about buying fair businesses at wonderful prices; instead, buy

wonderful businesses at fair prices.

-- Warren Buffett, 50th annual shareholder letter

Chipotle Mexican Grill - Business Description

Fast Casual QSR Mexican Restaurant

1,783 Restaurants

Includes 17 International Chipotles

(Canada, London, Paris, Frankfurt)

9 Shophouse Asian Kitchens (Washington

D.C. and LA)

2 Pizzeria Locales (Denver)

Catering ~ 1.3% sales

Found in 1993 in Denver Colorado

3/10/2015

Ticker NYSE: CMG

Price $660.77

Market Cap 20.3 B

P/E (ttm) 46.34

Forward P/E 31.74

EBIT Margin 17.47%

Net margin 10.84%

Cash + Inv. 1.25 B

Debt $0

Revenue (ttm) $4.1 B

Net income $445 M

FCF(est.) 400 M

Short % Float 2.80%

52 week

range

472.41-

727.97

Investment Thesis

Highest-Quality Name in Secular Tailwind

Food with Integrity brand is food becoming a credence good?

Unique Business Model*

Industry-leading growth rates AND margins, no debt

Enormous TAM

Greatly increase store count

Further room for store outperformance

Intangibles

Management Team plus board

Unique employee culture

Good Entry Point

Current pessimism sets up for surprises

History of guiding conservatively, embarrassing prominent naysayers

Business Model

Do very few things and do them well.

Invest and Spend in higher-quality food than other fast food and QSR chains

- Antibiotic-free, hormone-free dairy and meat, Organic and Non-GMO when practical

- Humanely raised unconfined animals with exposure to outdoors and space

- Sustainably raised, local farms

- Use classic cooking techniques in open kitchens, braising and slow-cooking meats

Keep costs down by

- Never changing menu limits advertising spend, simplifies process

- Employee advancement incentivizes low-end workers, limits turnover, improves service

- Sparse dcor

- Throughput through assembly-line serves people quickly/ efficiently

Food With Integrity brand being established

Other Aspirational Consumer Brands have done well

?

Food With Integrity brand Fits with Secular Tailwind

According to Whole Foods, the organic food sector has grown by 20%

CAGR over the past 10 years Kroger claims it is 12%. Either way,

the entry of giants like Kroger, Walmart, and General Mills into organic

prove this is not a fad.

A recent FDA survey found that for the first time, more than half of US

consumers read the labels on their food.

Is food becoming a credence good?

87% of fast casual diners say they prefer to eat foods that are grown

locally up from 70% in 2011.

86% ingredients raised or grown in a more responsible way taste

better, up from 76% in 2011.

73% feels it's important to buy organic for certain food items up from

61% in 2011.

69% try to eat meat that has been raised responsibly and thats up

53% in 2011.

Evidence: Most recent Quarter: MCD comps - 4.0% CMG + 16.1%

vs.

Food With Integrity Chipotle over Rivals

According to Brand Keys, a consultancy

measuring customer loyalty and engagement,

rated Chipotle the #1 restaurant brand in the

casual/ fast dining category

Industry study shows that Chipotle is 3rd-most

popular overall brand among teens, up from #8

in 2013

Millennials 75% more likely to choose Chipotle

over other brands (Q4 conference call)

The upshot: Chipotle is extremely popular

with a young generation that are likely to

become lifelong customers.

http://brandkeys.com/

Food With Integrity Unconventional marketing

Sponsored satirical show on Hulu

Viral Videos , Long-form

Commercials

Cultivate Music Festivals

Food With Integrity Unique Employee Culture

Emphasizes hiring entrepreneurial top-performers

- Seeks out employees passionate about food

- Hands on training in classic cooking techniques

- Internal Promotions: 90% of salaried management and about 98%

of hourly management coming from internal promotions

Restauranteurs

- Best general managers who improve teams promoted to

Restauranteur get stock options

- Restauranteurs train other restaurants. Once they have improved 4

restaurants, they can be promoted to field leadership

Food With Integrity Growth Seeds

Shophouse Southeast Asian Kitchen 9 Restaurants (Washington D.C, LA)

Pizzeria Locale - 2 Restaurants (Denver, CO)

Total Addressable Market

Mission:

Our mission is to change the way

people think about and eat fast food.

McDonald's 36,258

Yum Brands 40,000

Domino's 11,600

Wendy's 6,515

Starbucks 21,656

Panera 1,880

Jack in the Box 2,800

Dunkin 11,310

Red Robin 514

Chipotle 1,783

Restaurants

Management

Founder and Co-CEO Steve Ells

- Former Chef

- Studied at Culinary Institute of America in Hyde Park, NY

- Sous chef under Jeremiah Tower at Stars restaurant in

San Francisco

- Started Chipotle in 1993 in Denver, CO.

Co-CEO - Montgomery Moran

- Chief Executive Officer of the Denver law firm Messner &

Reeves, LLC

- With Chipotle since 1996

Board of Directors

- Includes 2 former McDonalds executives

- Kimball Musk (brother to Elon)

Recent Numbers Steadily Improving

Key Financials

For the Fiscal Period Ending 12 months

Dec-31-

12 months

Dec-31-

12

months

12 months

Dec-31-

12 months

Dec-31-2014A

Currency USD USD USD USD USD

Total Revenue 1,835.9 2,269.5 2,731.2 3,214.6 4,108.3

Growth Over Prior Year 20.9% 23.6% 20.3% 17.7% 27.8%

Gross Profit 692.3 840.4 1,027.0 1,202.2 1,552.0

Margin % 37.7% 37.0% 37.6% 37.4% 37.8%

EBITDA 363.0 431.3 545.0 635.5 828.3

Margin % 19.8% 19.0% 20.0% 19.8% 20.2%

EBIT 294.1 356.4 460.9 539.5 717.8

Margin % 16.0% 15.7% 16.9% 16.8% 17.5%

Earnings from Cont. Ops. 179.0 214.9 278.0 327.4 445.4

Margin % 9.7% 9.5% 10.2% 10.2% 10.8%

Net Income 179.0 214.9 278.0 327.4 445.4

Margin % 9.7% 9.5% 10.2% 10.2% 10.8%

Diluted EPS Excl. Extra Items 5.64 6.76 8.75 10.47 14.13

Growth Over Prior Year 42.8% 19.9% 29.4% 19.7% 35.0%

Source: Capital IQ

More Recent Numbers Restaurant Stats

Restaurant Level Margins 2014: 27.2%

- Up 0.6% from prior year

** Pricing Power** - CMG raised prices ~ 6.5% mid-year with no letup in

traffic. Price raise affected comps by 3.8% this year

Valuation Comps

Industry Classifications

Fast-Food Restaurants

(Primary) 2 Year Beta

[Latest]

P/LTM

Diluted EPS

TEV/LTM EBITDA

[Latest] (x)

Net Income

Margin % [LTM]

Revenues, 1 Yr

Growth % [LTM] (%) Total Debt

Cash And

Equivalents

Market

Capitalization

Total 8.11 432.0 485.0 243.0 193.2 32,888.3 5,289.6 184,673.9

Average 0.58 30.9 28.5 12.8 11.4 1,731.0 278.4 9,719.7

Minimum 0.0 1.27 10.3 ( 7.18) ( 17.1) 0 0.12 227.9

Median 0.5 34.15 15.9 7.92 11.8 109.9 13.1 636.3

Maximum 1.05 48.9 141.3 75.8 47.9 14,997.2 2,077.9 92,546.1

Standard Deviation 0.3 12.4 33.7 19.7 14.2 4,008.8 609.2 22,021.1

Market Cap. Weighted Avg. 0.61 28.0 20.6 13.6 3.1 9,247.2 1,381.5 N/A

Chipotle Mexican Grill,

Inc. (NYSE:CMG)

0.487 46.7 23.8 10.8 27.8 0 419.5 20,311.3

Debt/E Unlevered

Median Beta 0.5 0.18 0.45

CMG levered 0.43

19 US- Based Fast-Food Companies

Valuation Trailing P/E This year

Valuation 15-Year DCF Base Case Assumptions

5Year Top-Line: 16%

Terminal Year Top-line: 3%

Grows from 4.B to 20 B in revenues in 15 years

$20B 15 years from now is ~ $14.8B in todays dollars assuming 2% inflation, or about the

the size of McDonalds (on a revenue basis).

Assuming $2.5M/ restaurant (todays number) that = 5900 restaurants = 270/ year with no

improvement in revenues/ restaurant, which is doable because CMG is opening a greater

number of restaurants every year and they have higher volumes than they used to.

Operating margin expansion:17.5% to 19%. Current restaurant-level margins: 27.2%

WACC: 7.12% moving to 8% in year 10

**Beta used 0.85 going to 1 in year 10 (* actual estimate is 0.43 and sector median is 0.5!!!)

Valuation 15-year DCF Base 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Growth in Revenue 16.00% 16.00% 16.00% 16.00% 16.00% 14.70% 13.40% 12.10% 10.80% 9.50% 8.20% 6.90% 5.60% 4.30% 3.00%

Growth in Deprec'n 12.00% 12.00% 12.00% 12.00% 12.00% 11.10% 10.20% 9.30% 8.40% 7.50% 6.60% 5.70% 4.80% 3.90% 3.00%

Revenues 4,108,269$ 4,765,592$ 5,528,087$ 6,412,581$ 7,438,594$ 8,628,769$ 9,897,197$ 11,223,422$ 12,581,456$ 13,940,253$ 15,264,577$ 16,516,273$ 17,655,895$ 18,644,626$ 19,446,345$ 20,029,735$

COGS

% of Revenues 82.70% 82.56% 82.42% 82.28% 82.14% 82.00% 81.80% 81.60% 81.40% 81.20% 81.00% 81.00% 81.00% 81.00% 81.00% 81.00%

- $ COGS 3,397,469$ 3,934,408$ 4,556,193$ 5,276,228$ 6,110,036$ 7,075,590$ 8,095,908$ 9,158,312$ 10,241,305$ 11,319,486$ 12,364,308$ 13,378,181$ 14,301,275$ 15,102,147$ 15,751,539$ 16,224,085$

EBIT 710,800$ 831,184$ 971,894$ 1,136,353$ 1,328,558$ 1,553,178$ 1,801,290$ 2,065,110$ 2,340,151$ 2,620,768$ 2,900,270$ 3,138,092$ 3,354,620$ 3,542,479$ 3,694,805$ 3,805,650$

Tax Rate 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00%

EBIT (1-t) 440,696$ 515,334$ 602,574$ 704,539$ 823,706$ 962,971$ 1,116,800$ 1,280,368$ 1,450,894$ 1,624,876$ 1,798,167$ 1,945,617$ 2,079,864$ 2,196,337$ 2,290,779$ 2,359,503$

+ Depreciation 110,000$ 123,200$ 137,984$ 154,542$ 173,087$ 193,858$ 215,376$ 237,344$ 259,417$ 281,208$ 302,299$ 322,250$ 340,619$ 356,968$ 370,890$ 382,017$

- Capital Expenditures 225,000$ 252,000$ 282,240$ 316,109$ 354,042$ 396,527$ 380,704$ 364,882$ 349,059$ 333,236$ 317,414$ 338,363$ 357,650$ 374,817$ 389,435$ 401,118$

- Change in WC 160,000$ 86,767$ 100,649$ 116,753$ 135,434$ 157,103$ 167,433$ 175,062$ 179,260$ 179,361$ 174,811$ 165,224$ 150,430$ 130,512$ 105,827$ 77,008$

= FCFF 165,696$ 299,767$ 357,669$ 426,219$ 507,318$ 603,198$ 784,039$ 977,769$ 1,181,991$ 1,393,486$ 1,608,241$ 1,764,281$ 1,912,403$ 2,047,976$ 2,166,408$ 2,263,394$

Terminal Value (in '05) 46,625,925$

COSTS OF EQUITY AND CAPITAL

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Cost of Equity 7.12% 7.12% 7.12% 7.12% 7.12% 7.29% 7.47% 7.65% 7.82% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%

Proportion of Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

After-tax Cost of Debt 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41% 3.41%

Proportion of Debt 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Cost of Capital 7.12% 7.12% 7.12% 7.12% 7.12% 7.29% 7.47% 7.65% 7.82% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%

Cumulative WACC 107.12% 114.74% 122.90% 131.64% 141.01% 151.29% 162.59% 175.02% 188.72% 203.81% 220.12% 237.73% 256.75% 277.29% 299.47%

Present Value 279,856$ 311,731$ 346,802$ 385,371$ 427,768$ 518,225$ 601,360$ 675,327$ 738,400$ 789,071$ 801,510$ 804,446$ 797,661$ 781,286$ 16,325,261$

FIRM VALUATION

Value of Firm 24,584,075$

+ Cash and marketable securities = 1,225,000$

- Value of Debt -$

Value of Equity 25,809,075$

- Value of Equity options issued by firm 595,000$

Value of Equity per Share 800.14$

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Value of firm by year 24,584,075$ 26,033,465$ 27,528,077$ 29,060,481$ 30,620,817$ 32,196,290$ 33,760,005$ 35,303,771$ 36,821,106$ 38,308,135$

$ Value of Debt -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Value of Shares 865.02 912.45 961.08 1,010.59 1,060.59 1,110.21 1,159.20 1,207.35 1,254.54

Valuation 15-Year DCF Present Value Sensitivity

High growth vs. Terminal Growth

800.14$ 14.0% 15.0% 16.0% 17.0% 18.0%

2.0% $599.80 $645.29 $694.13 $746.56 $802.82

2.5% $640.54 $689.62 $742.35 $798.96 $859.73

3.0% $689.38 $742.77 $800.14 $861.77 $927.95

3.5% $749.00 $807.66 $870.71 $938.47 $1,011.25

4.0% $823.47 $888.70 $958.85 $1,034.27 $1,115.30

High growth vs. mature Operating Margin with 3% terminal

$800.1 14.0% 15.0% 16.0% 17.0% 18.0%

17.0% $624.10 $671.89 $723.23 $778.36 $837.53

18.0% $656.74 $707.33 $761.69 $820.06 $882.74

19.0% $689.38 $742.77 $800.14 $861.77 $927.95

20.0% $722.01 $778.21 $838.60 $903.48 $973.16

21.0% $754.65 $813.64 $877.05 $945.19 $1,018.37

Valuation 15-Year DCF 1-Year Price Target

High growth vs. Terminal Growth

865.02 14.0% 15.0% 16.0% 17.0% 18.0%

2.0% $650.36 $699.12 $751.47 $807.66 $867.95

2.5% $694.00 $746.61 $803.11 $863.78 $928.90

3.0% $746.31 $803.53 $865.02 $931.06 $1,001.98

3.5% $810.18 $873.04 $940.61 $1,013.22 $1,091.21

4.0% $889.95 $959.85 $1,035.02 $1,115.83 $1,202.66

High growth vs. mature Operating Margin with 3% terminal

865.02 14.0% 15.0% 16.0% 17.0% 18.0%

17.0% $676.39 $727.61 $782.63 $841.72 $905.13

18.0% $711.35 $765.57 $823.83 $886.39 $953.56

19.0% $746.31 $803.53 $865.02 $931.06 $1,001.98

20.0% $781.27 $841.49 $906.21 $975.74 $1,050.41

21.0% $816.23 $879.45 $947.40 $1,020.41 $1,098.83

Some More Quotations

"Taco Bell has started to eat Chipotle's lunch"

David Einhorn, 10/2/12

- since then CMG + 130%

I think its a great time to short it though. Im actually looking at a $380 price. It

might get there today, I dont know, but it hasnt gotten there recently. Thats

like the perfect price to short it at, and at that price I think Ill come in and do it.

-- Jeff Gundlach, 5/20/2013

-- since then CMG + 77%

Current Pessimism

Can they Top Last Years Performance?

- record comps tough to beat

Food Inflation

- High beef, dairy, and avocado inflation lead to food costs at ~ 35%

of costs, up from 33%

Looks Expensive

Optimistic Surprises?

History of Conservative Guidance

Investments in people to pay off?

- More Field Leaders per restaurant now than ever before even better performance?

Despite insane comps, room for improvement?

- currently the top-performing CMGs are 3 times faster at peak times than the average store.

If food inflation moderates:

- margins could expand with no price increase

US Economic Tailwinds - Lower gas prices,

improving economy, no ill-effect from strong $

Chipotle Mexican Grill (CMG)

Recommendation: BUY

Billy Duberstein

March 12, 2015

This report is published for informational purposes only by students of the Michael Price Student Investment Fund, a

student-run organization the Leonard N. Stern School of Business at New York University.

Current Price: $660

Present Value est.: $800

Upside: 21%

1-year Price Target: $865

Upside: 31%