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Module 13: full- information forecasting & valuationCompany: chipotle Matt Ramirez
Chipotle background • Mexican grill that focuses on serving quality food while maintaining speed and efficiency • Founded 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 • Experiencing rapid growth recently and focused on national and international expansion
Forecast assumptions • Food, Beverage, and Packaging: Largest EPAT expense- steadily rising and will continue to rise as Chipotle expands • Labor: Steadily declining, will continue to decline for a few years as sales increase but will reach steady state after growth slows • Other Operating Expenses: Unclear what is included, but 10-K states that they will grow as % of sales in future
Epm without full-information New EPM is lower than previous years: inclusion of ESO adjustment adds an additional expense that reduces profits
Forecast assumptions • Leasehold Improvements & Buildings: Has been significantly declining as sales increase- trend will continue until sales slow • Equipment: No true trend- will hover around 7.5% or so • Operating Leases Adjustment: Most significant impact to Enterprise Assets- assumed steady impact yearly
Forecast assumptions • Accounts Payable: No true trend- 2% chosen as “midpoint” • Deferred Rent: slowly declining, but will likely slightly increase as expansion continues
Eato forecast EATO is significantly lower due to addition of Operating Leases: Inclusion of these assets shows that Chipotle is not utilizing its assets as efficiently as its financial statements lead to believe
Sales growth explanation • Chipotle expected to maintain a high growth rate for near future, but this growth % will steadily decline • 16.79% chosen as average of expected earnings and analysis from past trends, but will decline roughly 2.5% per year: level of growth is not sustainable (judging from past few years) • 4% continuing growth chosen as Chipotle’s rapid based on own and analyst estimates
Agr model used for valuation • While all 3 valuation models yield the same value, the AGR captures 91% of value within horizon • 91% of value is attributed to predicted 2014 EPAT & PV of AGR • Most comfortable with capturing value within horizon due to uncertainty of Chipotle’s future and rapid growth
Recommendation = Sell Chipotle’s market price is 3.85 times larger than calculated value
Analysis of recommendation • Chipotle is significantly over-valued by the market: what is this value attributed to? • Judging from the sensitivity analysis, even significant changes in the valuation models yield a lower value than the market • Certain adjustments had significant impacts on valuation: Operating Leases greatly impacted NEA and therefore FCF, leading to lower value
Final comments • Expectation of future payoffs are lower than the markets or expected risk of Chipotle is higher than the markets: Chipotle’s current growth is not sustainable and will eventually slow down • Is market aware of “off-balance sheet” items (Operating Leases/ESO’s)? Or are they ignoring it? • One thing is clear: Chipotle is clearly over-valued by the market and its momentum will likely slow down within the next few years
Valuation without eso adjustment • Without adjusting for ESO’s, Chipotle’s value increases dramatically • Originally did not include as part of Mod 11: did not think the options should be considered “options” • Is market aware of these options? Should they be added or ignored? • Major issue: With options, Chipotle is significantly overvalued, with them, Chipotle is slightly undervalued