Mihai Mazilu

SELL
Target Price: $131

Recent Price: $279.00

Market Data
Market Cap. (bln)
$8.50
Enterprise Value (bln)
$8.10
Fully Diluted Shares
Trailing P/E (ttm)
48.58
Forward P/E
33.13
PEG Ratio (5 yr exp)
2.00
Enterprise Value/EBITDA 22.32
Balance Sheet
Total Cash (mil)
Total Cash Per Share
Total Debt (mil)
Total Debt/Equity
Current Ratio
Book Value Per Share

$349.6
$11.26
$3.78
0.47
3.30
26.09

The Valuations
Our research focused on applying a diverse range of methodologies to gauge whether the current
market valuation is realistic and sustainable.
The graph below shows the various valuation ranges from the various methodologies used. The
resulting range of share prices is very wide from $84.30 (in the case of a conservative hybrid DCF
approach) to $310.87 (in the case of the market approach using earnings multiples). Most
valuations though are below the current market value.
We decided that the most realistic valuation is the hybrid DCF approach because that shows the
intrinsic value of the company. The target price per share of $130.89 was chosen and it is based on
a more relaxed hybrid DCF approach.

$700.00

$600.00

$500.00

Price per Share

*Data above as of Apr 3, 2011

CHIPOTLE MEXICAN GRILL , Inc.

(NYSE: CMG)
Coverage Initiation Report

$400.00
$310.87

$300.00
$236.15
$184.38

$200.00

$171.53

$130.89

Beta:
0.86
52-Week Chg.
129.67%
52-Week High
$278.00
52-Week Low
$114.87
50-Day Moving Avg. $255.35

Company Overview
Chipotle Mexican Grill, Inc. operates
restaurants in 35 states throughout
the United States, Ontario, Canada
and London, UK.
The restaurants serve a focused
menu of tacos, burritos, salads and
burrito bowls, made using fresh
ingredients. The chain is focused on
trying to find the highest quality
ingredients to make great tasting
food; on recruiting and retaining top
performing people to ensure that the
restaurant experience provided is
exceptional.
The companys motto is Food With
Integrity, and of the food served
inside restaurants 100% of the
pork, 100% of the chicken, and
about 60% of the beef is naturally
raised .

$236.15

$171.53

$100.00
$84.30

$278.00
Current, $274.00

$76.25

$95.54

$114.87

$0.00

Opinion About the Current Market Valuation

As shown in the analysis, Chipotle Mexican Grill is, by most methodologies used, overvalued.
Chipotle Mexican Grill is a top performer and an innovator in the field of fast food. It managed to
take a very simple culinary conceptthe burritoand build an assembly line around it and thus
create a easy to customize and easy to deliver product. It also managed to create a very dynamic
and scalable staffing structure, which allows it to serve record numbers of customers in each
location and to easily expand.
Despite this, there are however some serious headwinds to be considered, which may seriously
challenge the current market valuation:
The expected high growth (13% yearly increase in the number of restaurants in the next five
years), will put serious pressure on the margins.
Inflation in the price of the food commodities will also put additional pressures on the margins.
Chipotle plans to expand its business by creating an Asian concept, based on a very similar
business model. This creates the risk of spreading resources too thin. New marketing and fixed
capital money are needed for the new concept, and would most probably distract the company
from its focus on the already successful burrito concept.
The management at Chipotle is very skeptical about international expansion. In the medium to
long run, it may be missing very important growth opportunities that may put it at a
disadvantage to the competition. It may also, over the same horizon, limit the gains related to
foreign currency conversions (considering the ongoing devaluation is the US Dollar)
Reducing the proportion of undocumented laborers used in the restaurant locations, may in the
short to medium term, put additional pressure on the margins.

Delia Mazilu, Mihai Mazilu

Chipotle Mexican Grill, Inc. (NYSE:CMG) Coverage Initiation Report

Company overview
Chipotle Mexican Grill, Inc. operates fast-casual, fresh Mexican food restaurants in the United
States, Toronto, Canada and in London, United Kingdom. As of December 31, 2010, it operated
1,084 restaurants. Chipotle Mexican Grill, Inc. was founded in 1993 and is based in Denver,
Colorado. Chipotle experienced the greatest share increase among fast casual players in 2009
appealing to consumers growing demand for fresh fast food. Chipotles philosophy is food
with integrity, meaning it sources the highest-quality ingredients that are grown or raised with
respect for the environment, animals or the people who grow them. Chipotle also believes that
food served fast does not have to be what is known as traditional fast food in America greasy,
unhealthy or low quality. Chipotle has succeeded by emphasizing freshness and customization.
All items are made to order and are cooked from raw ingredients, rather than arriving frozen at
each outlet.

Market and Competitors

Chipotle operates in the space defined as fast casual, part of the fast food industry. This
segment is essentially composed by restaurants where patrons pay before eating. In the US
alone, fast food brought in $184.00 billion in 2010 and is
expected to grow at a stable, albeit slow, growth rate of 2.5%
for next 5 years. This growth is spurred by ethnic and
specialty markets. Over 300,000 business report activity in
this space.
Key drivers of this industry are: reduced consumer
spending increased health consciousness, increased
competition from full service restaurants and
consolidation. Competitive pressure and declining demand
are forcing companies to consolidate their operations and
streamline employment.
Industry margins have fallen or, at best remaining flat, because of lower sale volumes,
customers opting for value menu items (thin margin), high levels of price competition as the
industry is reaching saturation and steadily increasing raw material prices.

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Chipotle Mexican Grill, Inc. (NYSE:CMG) Coverage Initiation Report
In building our valuation model, we considered Chipotle in the context of their industry. We
selected a group containing a variety of fast growing smaller competitors, positioned to serve a
trendier, healthier consumer, scaling down from full service restaurants. We were also
compelled to include industry giants like McDonalds and Yum! Brands, because they account
for such a large portion of their shared competitive landscape.
Buffalo Wild Wings, the number two fast casual chain, also experienced strong growth, with 90
new units in 2009 and a strong focus on chicken wings, beer, and sports. The company also has
a strong financial position, with no debt. The chain implements strategies tailored to the
specifics of the community each restaurant is located in. Areas with a higher concentration of
families will offer a childrens night, while others will focus on emphasizing drawing
consumers in to watch sporting events on television.
Panera Bread: The third player in fast casual dining also saw moderate success during a year
that was very difficult for many of its competitors. Rather than discounting, as many fast food
operators chose to do, Panera focused on innovation and quality and therefore achieved better
sales results. Among improvements, for example, it used better product management to reduce
the amount of lettuce it was using. The company has been able to succeed in a declining
economy through gaining traffic from consumers trading down from full-service restaurants
and new menu items target more heath conscious patrons.
McDonalds: The leading fast food company has increased its share by appealing to young
people, while remaining a destination for families. The Big Mac and fries remain the core of the
companys growth strategy, but that is supplemented by continuous innovation that includes
affordable snack options, the dollar value menu and premium coffee. As a response to the
negative publicity associated with the perceived role of its hamburgers and fries in ruining the
American diet, McDonalds Corp launched a line of salads and other healthy items in order to
address consumers desire to eat better. In 2009, the company remained committed to
innovation and value. To appeal to the growing number of full-service customers who were
trading down to fast food, McDonalds introduced the Angus burger in July 2009, a premium
burger experience at an affordable price.
California Pizza Kitchen: This company's cookeries are putting a West Coast twist on an old
favorite. California Pizza Kitchen (CPK) operates a chain of about 265 casual-dining restaurants
that specialize in gourmet pizzas featuring unique topping combinations. The restaurants are
found in more than 30 states and about a dozen other countries; more than 200 of the locations
are company-owned. Like many other dining operators, the company has struggled with
declining sales during recent years due largely to the recession, high unemployment, and the
effect of the mortgage crisis in its core markets in California and Florida. CPK responded by
pulling back sharply on expansion efforts to focus on reducing costs and new menu items
designed to attract additional traffic to its restaurants.

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Chipotle Mexican Grill, Inc. (NYSE:CMG) Coverage Initiation Report
Yum! Brands Incs growth strategy has historically focused on expanding the multi-branding
concept. However after two years of less than satisfactory performance, the company is deemphasizing its multibranding strategy as its core growth plan, focusing instead on increasing
the appeal of its individual brands. The company has focused on boosting its bottom line
through cost-cutting measures, prompted by rising food and fuel costs. Part of that effort has
involved reducing the number of corporate-run locations through refranchising (700 restaurants
in the US were sold to franchise operators in 2008 alone). Yum! Brands is focused on menu
differentiation, including healthier fare and improving the quality of the companys facilities.
BJ's Restaurants, Inc: owns and operates 93 restaurants located in 13 states. The companys
restaurants operate either as a BJs Restaurant & Brewery which includes a brewery within the
restaurant, a BJs Restaurant & Brewhouse which receives the beer it sells from one of its
breweries or an approved third-party craft brewer of proprietary recipe beers, or a BJs Pizza &
Grill which is a smaller format, full service restaurant with a more limited menu. BJs reported
steadily increasing same store sales since Q1 2009 and managed to maintain growth to date. The
more upscale atmosphere, superior service and interesting menu is the backbone of their
position strategy, which so far proved successful as restaurant traffic has surpassed industry
averages.
P.F. Changs China Bistro, Inc: operates restaurants under the P.F. Changs China Bistro
(Bistro) and Pei Wei Asian Diner (Pei Wei) names. As of January 2011, the company owned and
operated 201 full service Bistro restaurants that feature a Chinese-inspired cuisine and attentive
service. The menu features traditional Chinese offerings and dishes that illustrate the emerging
influence of Southeast Asia on modern Chinese cuisine. It also owned and operated 168 quick
casual Pei Wei restaurants that offer a menu of Asian cuisine. The company enjoys a strong cash
position, essentially no debt and anticipates completing a $60 million share repurchase effort
this year.

Benchmarking
Exhibit 8 Benchmarking Against Select Competitors shows how the financial metrics of Chipotle
Mexican Grill match against the one of the comparable companies divided in the following
categories:
Quick service restaurants McDonalds, and YUM Brands
Fast casual restaurants Panera Bread and Buffalo Wild Wings
Casual dining restaurants California Pizza Kitchen, PG Changs and BJs Restaurants
In terms of profitability, Chipotle has one of the highest gross margins(higher even than
McDonalds). The only company with a higher 5 year CAGR is BJs Restaurants.
Chipotle also has the highest 5 year CAGR in net income.
The benchmarking shows that Chipotle Mexican Grill Inc. is one of the top performers in the
industry.

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Chipotle Mexican Grill, Inc. (NYSE:CMG) Coverage Initiation Report

Part B Valuation
The following valuation methodologies have been applied:
Discounted Cash Flow
Comparable Companies Market Multiples valuation (both based on EBITDA and
earnings multiples)
Precedent Transactions Multiples valuation (both based on EBITDA and earnings
multiples)
The results of our analysis are described in more detail in the exhibits included.
The table below summarizes the results of the valuation approaches used.
($ USD in thousands)
Equity Valuation Reconciliation
Income Approach - DCF Analysis
Market Approach - Guideline Public Companies - EBITDA Multiples
Market Approach - Guideline Public Companies - Earnings Multiples
Market Approach - Precedent Transactions - EBITDA Multiples
Market Approach - Precedent Transactions - Earnings Multiples
Current Market Cap

$
$
$
$
$

Min
2,675,362
2,419,909
3,031,938
5,443,417
7,494,199

$
$
$

Number of outstanding Shares (End of year 2010)

Implied Price per Share
Income Approach - DCF Analysis
Market Approach - Guideline Public Companies - EBITDA Multiples
Market Approach - Guideline Public Companies - Earnings Multiples
Market Approach - Precedent Transactions - EBITDA Multiples
Market Approach - Precedent Transactions - Earnings Multiples
52 Week range
Current Price per Share (As of 04/03/2011)

Max
$4,153,889
5,851,408
$9,865,433
5,443,417
7,494,199
$8,500,000

31,735,000
Min
$
$
$
$
$
$

84.30
76.25
95.54
171.53
236.15
114.87

Max
$
$
$
$
$
$
$

130.89
184.38
310.87
171.53
236.15
278.00
274.00

Exhibit 7 Football Field Valuation Graph presents the football field valuation in a more visual
manner.
The following conclusions can be drawn from the valuations above:
It seems that the market grossly overvalues Chipotle Mexican Grill, Inc. The very high
current market capitalization of the company is mostly due to institutional buyers who see
the company as a perfect candidate for their high growth funds. But even in a high growth
scenario, where the company would need to a lot of cash to expand, the intrinsic value will
be substantially lower (less than half) of what the market price is.
The markets seem to be overvaluing the top high growth performers in the restaurant
industry (Chipotle Mexican Grill and BJs Restaurants).
Due to the bubble like valuations for the top performers, valuations for the top performers
are very high compared to the rest of the players in the industry.
The market favors the use of earnings multiples, which are prone to substantially increase
the valuations for the companies in the industry.

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Chipotle Mexican Grill, Inc. (NYSE:CMG) Coverage Initiation Report

Discounted Cash Flow

The DCF Model is presented below:
Free Cash Flow s Calculation

Est

Est

Est

Est

Est

Est

2011

2012

2013

2014

2015

2016

EBIT

$267,662

$277,593

$280,751

$274,432

$254,780

$193,567

EBIT(1-t)

$165,147

$171,275

$173,223

$169,325

$157,199

$119,431

$80,829

$94,625

$110,699

$129,421

$151,238

$156,969

Change in Working Capital

$122,981

$69,322

$80,767

$94,076

$109,626

$28,800

CAPEX

$112,095

$131,461

$154,777

$181,536

$213,909

$77,379

$10,900

$65,116

$48,378

$23,134

($15,097)

$170,220

Depreciation

FFCF

Based on:

QSR Avg

Terminal Values

Fact Casual

Casual Dining

Com parables

BJ's

$3,629,799

$4,115,292

$3,459,789

$3,695,650

$57,208

$39,838

$17,856

($10,923)

NPV

$2,575,636

$2,904,858

$2,460,349

$2,620,290

$3,938,876

Value of operations

$2,575,636

$2,904,858

$2,460,349

$2,620,290

$3,938,876

$224,838

$224,838

$224,838

$224,838

$224,838

$2,800,474

$3,129,696

$2,685,187

$2,845,128

$4,163,714

DCF
WACC

Cash
Intrinsic Enterprise Value (EV)
(-) Interest Bearing Debt
Equity Value

$10,217

$5,640,123

6.69%

($9,825)

($9,825)

($9,825)

($9,825)

($9,825)

$2,790,649

$3,119,871

$2,675,362

$2,835,303

$4,153,889

As will be later discussed in more detail, the main driver for the equity valuation using the DCF
method is the terminal value. The value per share using this method varies greatly from $84.40
to $130.89.
Exhibit 1 Net Working Capital Calculation details the calculation used to calculate the estimate
working capital balances.
The assumptions related to the DCF model are as follows:
Food, beverage and packaging costs growth rate is expected to be 4%, due to inflationary
expectations over the next 5 years. These inflationary trends can already be experienced in
the commodities markets and can increase over time, especially in the food related
commodities.
Labor cost growth rate is expected to be tame at 2% per year, due mainly to very high
unemployment rates in the US making restaurant labor available at a discounted price.
However, there are risks associated with the possibility of increases due to the company
having to increase its use of legal labor, which can lead to more labor increases.
The average occupancy cost per location is expected to be at $119,000 per year, which is
exactly the average 2009-2010.
Based on the 2006-2010 averages:
o Other operating costs are expected to be 11% of revenue
o Loss on disposal of assets is expected to be 0.4% of revenue
o G&A is expected to be 6.5% of revenue
o Depreciation and amortization is expected to be 4% of revenue
o Other Net Income is expected to be 0.07% of revenue
Exhibit 2 Revenue and CAPEX Projection details the how the revenue and CAPEX projection
was based.
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Chipotle Mexican Grill, Inc. (NYSE:CMG) Coverage Initiation Report

Average revenue per same store unit at the end of 2010 was $1,840,000 (as reported by the
management) and it is assumed to be growing by 3% per year from 2012 through 2015 (the
management expected it to grow in the low single digits).
Once a new location is opened, it will reach the mature location average revenue ($1,840,000
in 2010 and adjusted by 3% for subsequent years) in approximately 2 years. In the first year
of operation, the location will reach half of that target.
The number of locations is expected to continue to grow by 13% each year. The number is
reasonable one because it represents a more stable number (it went down from 23% per year
in 2006 to 13.4%).
Beginning with 2016, the company is expected to enter the stable growth mode, expanding
its number of locations by just 4% per year.
The cost for per opening a new location was $795,000 in 2010 and is expected to grow with
inflation (2% in 2011 and 4% after that, due to the loose monetary policy).

Exhibit 3 Projected Income Statement shows the projected income statement through 2016.
Discount Rate
WACC will be equal to the cost of equity (which is calculated below and equal to 6.688%), as the
only outstanding debt was paid off at the beginning of the 2011 year (as mentioned in the
financial reports). It is assumed that the company will not be taking any or will be taking an
immaterial amount of debt in the next six years. The management is very averse to borrowing
as shown by the last five years lending activity.
Beta
0.86
Rf
3.248%
Rm
4%
Re
6.688%
WACC = 6.688%

Terminal Value
The value of the business operations (based on the assumptions previously discussed) over the
5 year forecasting horizon is only $114,196,000, mostly due to the fact that during the
forecasting horizon a lot of money is being reinvested in expansion. This is why, the terminal
value is the main driver for the intrinsic value of the Chipotle Mexican Grill, Inc equity.
Exhibit 4 Terminal Value Calculation shows the details for the terminal value calculation. The
comparables used were divided into three categories, considered most similar to the business
model and industry of Chipotle Mexican Grill:
Quick Service Restaurants McDonalds and YUM Brands are the most representative
players in the category. Chipotle belongs to this category because one of its focuses is to
provide healthy food quickly.
Fast Casual Restaurants is also a category representative for the business model of
Chipotle Mexican Grill because while there is a fast food component to the way food is
delivered, there are other more upscale features such as better quality ingredients and a

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Chipotle Mexican Grill, Inc. (NYSE:CMG) Coverage Initiation Report

quirkier ambiance. The most representative public players and competitors are Buffalo
Wild Wings and Panera Bread Co.
Casual Dining Restaurants despite the fact that it does not provide table service,
Chipotle also meets the definition of this category. Representative companies in this
segment are: California Pizza Kitchen, P.F. Changs China Bistro and BJs Restaurants.

Based on the comparables selected the range for the terminal value can vary from $3,459,789,000
to $5,640,123,000.
The lowest terminal value will be generated when using the comparables for the
underperforming players in the casual dining restaurants segment (P.F. Changs China Bistro,
Inc. and California Pizza Kitchen, Inc.); but, this category also hold the player whose
comparables would create the highest terminal value BJs Restaurants, Inc. The latter
resembles Chipotle Mexican Grill most in all the relevant aspects: profitability, margins, growth
rate and customer base.

Precedent Transaction Approach

The most relevant past transaction was the purchase of Applebees International, Inc. by
DineEquitys IHOP for a price of $1.9 billion.
The details for this transaction are shown in Exhibit 5 Sale of Applebees International to IHOP
Transaction Details.
The multiples for this transaction are:
EBITDA Multiple: 14.97x
Earnings Multiple: 25.96x
The implied valuations for Chipotle Mexican Grill based on the above ratios are shown below:
CMG Metrics
Implied Equity Valuation
Interest Bearing Debt $ 9,825
EBITDA (EOY 2010)
$ 364,278
EBITDA Multiple
$
5,443,417
Earnings (EOY 2010)
$ 289,061
Earnings Multiple $
7,494,199
The Applebees sale is the only relevant transaction (similar segment casual dining, similar
customer base) that has occurred recently. Other transactions have occurred to but they were
too small to be a relevant term for comparison.

Comparable Companies Analysis

The same comparable categories and companies will be used like in the case of the terminal
value calculation.
Exhibit 6 Market Comparables shows the implied valuations based in the comparables. The
range is very wide, from $2,419,909,000 to $9,865,433,000.
The lowest valuation is achieved was comparing with California Pizza Kitchen, Inc which is
also the worst performer in the casual dining segment, but when comparing to the BJs
Restaurants, Inc. (which, along with Chipotle is one of the best performers) the valuation is
higher than the current market valuation.

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Chipotle Mexican Grill, Inc. (NYSE: CMG) Coverage Initiation Report

Exhibit 1 Net Working Capital Calculation

Net Working Capital Calc.
Cash and cash equivalents

Actual

Est

Est

Est

Est

Est

Est

2010

2011

2012

2013

2014

2015

2016
12.2%

$224,838

$246,528

$288,606

$337,631

$394,734

$461,275

$478,757

Accounts receivable

$5,658

$19,377

$22,684

$26,537

$31,026

$36,256

$37,630

Days AR

Inventory

$7,098

$12,733

$14,907

$17,439

$20,388

$23,825

$24,728

Days Inventory

Current deferred tax asset

$4,317

$4,041

$4,731

$5,535

$6,471

$7,562

$7,848

Prepaid expenses and other current assets

$16,016

$18,186

$21,291

$24,907

$29,120

$34,028

Income tax receivable

$23,528

$26,269

$30,753

$35,977

$42,062

$49,152

Investments

$124,766

$137,409

$160,862

$188,188

$220,015

$257,104

$266,848

Total current assets

$406,221

$464,544

$543,834

$636,213

$743,815

$869,203

$902,144

Accounts payable

$33,705

$58,130

$68,052

$79,612

$93,077

$108,767

$112,889

Days AP

10.5

Accrued payroll and benefits

$50,336

$149

$175

$205

$239

$280

$290

% to rev. Accrued payroll and benefits

2.7%

Accrued liabilities

$38,892

$116

$136

$159

$186

$218

$226

% to rev. Accrued liabilities

2.1%

$-

$-

$-

$-

$-

$-

% to rev. Current portion of deemed landlord financing

0.0%

$-

$-

$-

$-

$-

$-

% to rev. Income tax payable

0.0%

Current portion of deemed landlord financing

Income tax payable

$121
-

% to revenue Cash

3.5
2.3

% to rev. Current deferred tax asset

0.2%

$35,318

% to rev. Prepaid expenses and other current assets

0.9%

$51,015

% to rev. Income tax receivable

1.3%

% to rev. Investments

6.8%

Total current liabilities

$123,054

$58,396

$68,363

$79,976

$93,502

$109,264

$113,405

Working Capital

$283,167

$406,148

$475,470

$556,237

$650,313

$759,939

$788,739

The following assumptions have been used:

Days AR is based on the Days AR amount at the end of 2010 which was 3.37 (rounded to 3.5)
Days Inventory is based on the Days Inventory amount at the end of 2010 which was 2.29 (rounded to 2.3)
Days AP is based on the Days AP average for 2006-2010 rounded to 10.5 days
The % of revenue to Cash, Current deferred tax asset, prepaid expenses, income tax receivable, investments, accrued payroll, accrued
liabilities, Current portion of deemed landlord financing, income tax payable are based on the % to revenue for the 2010 reporting year.

Exhibits - Page 1 of 8

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Chipotle Mexican Grill, Inc. (NYSE: CMG) Coverage Initiation Report

Exhibit 2 Revenue and CAPEX Projection

Actual
2010

Est.
2011

Expected CPI
Investment Cost per Restaurant ($ 000s)
$
Expected # of net new locations
Total # of locations
1,084
Growth Rate
13%
Pre-opening costs per restaurant
60.21
Annual CAPEX

Pre-opening costs
Mature Location Average Revenue per Unit
Revenue from newly Opened Locations
$

Est.
2012

2%
795 $
141
1,225
13%
60.21
112,095

Est.
2013

4%
827 $
159
1,384
13%
60.21
131,461

Est.
2014

4%
860 $
180
1,564
13%
60.21
154,777

Est.
2015

4%
894 $
203
1,767
13%
60.21
181,536

Est.
2016

4%
930 $
230
1,997
13%
60.21
213,909

4%
967
80
2,077
4%
60.21
77,379

8,490

9,573

10,838

12,222

13,848

4,817

1,840
129,720

1,895
417,892

1,952
761,302

2,011
$ 1,169,174

2,071
$ 1,652,607

2,133
$ 1,732,048

Same Store Sales Growth Rate

3%
3%
3%
3%
3%
3%
Revenue From Units Opened 2010 and Prior $ 1,891,000 $ 1,947,730 $ 2,006,162 $ 2,066,346 $ 2,128,337 $ 2,192,187
Total Revenue

$ 2,020,720

$ 2,365,621

$ 2,767,463

$ 3,235,521

$ 3,780,944

$ 3,924,235

Pre-opening costs per restaurant are based on a historical average of the pre-opening costs per restaurant for 2006-2010.
Annual CAPEX = Investment costs per restaurant (adjusted for inflation) x Expected net number of new locations
Pre-opening costs = Pre-opening costs per restaurant x Expected net number of new locations

Exhibits - Page 2 of 8

Delia Mazilu, Mihai Mazilu

Chipotle Mexican Grill, Inc. (NYSE: CMG) Coverage Initiation Report

Exhibit 3 Projected Income Statement

All amounts in 000s

Actual

Est

Est

Est

Est

Est

Est

2010

2011

2012

2013

2014

2015

2016

Total revenue

1,835,922

2,020,720

2,365,621

2,767,463

Food, beverage and packaging costs

561,107

640,972

780,390

949,471

1,154,456

1,403,029

1,514,450

Labor costs

453,573

515,284

615,298

734,214

875,558

1,043,617

1,104,832

COGS

1,014,680

1,156,256

1,395,688

1,683,685

2,030,014

2,446,646

2,619,281

Occupancy costs

128,933

145,775

164,696

186,116

210,273

237,643

247,163

Other operating costs

202,904

222,279

260,218

304,421

355,907

415,904

431,666

Pre-opening costs

7,767

8,490

9,573

10,838

12,222

13,848

4,817

Loss on disposal of assets

6,296

8,083

9,462

11,070

12,942

15,124

15,697

General and administrative expenses

118,590

131,347

153,765

179,885

210,309

245,761

255,075

Depreciation and amortization

68,921

80,829

94,625

110,699

129,421

151,238

156,969

Total operating expenses

1,548,091

1,753,058

2,088,028

2,486,713

2,961,088

3,526,164

3,730,669

EBIT - Income from operations

287,831

267,662

277,593

280,751

274,432

254,780

193,567

269,076

279,249

282,688

276,697

257,426

196,313

Interest and other income - Revenue - Costs

Income before income taxes

Provision for income taxes

Net income

1,230
289,061

1,415

(110,080) $
178,981

EBITDA

1,656

(103,056) $

1,937

2,265

2,647

2,747

(98,594) $

(75,188)

172,296

174,418

170,722

158,832

121,125

348,491

372,218

391,449

403,853

406,018

350,536

2012

2013

(105,975) $

3,924,235

166,020

2011

(108,269) $

3,780,944

Assum ptions

(106,952) $

3,235,521

2014

2015

2016

Food, beverage and packaging costs Growth Rate 4%

4%

4%

4%

4%

4%

4%

Food, beverage and packaging costs % to revenue

30.5%

30.5%

30.5%

30.5%

30.5%

30.5%

30.5%

Labor costs Growth Rate

Labor costs % to revenue
Expected Number of Locations
Average Occupancy ost per Location
Other operating costs %

2%

2%

2%

2%

2%

2%

2%

25%

25%

25%

25%

25%

25%

25%

1,084
$

119

1,225
$

119

1,384
$

119

1,564
$

119

1,767
$

119

1,997
$

119

2,077
$

119

11%

11%

11%

11%

11%

11%

11%

Loss on disposal of assets

0.4%

0.4%

0.4%

0.4%

0.4%

0.4%

0.4%

G&A to Revenue %

6.5%

6.5%

6.5%

6.5%

6.5%

6.5%

6.5%

Depreciation and amortization %

4%

4%

4%

4%

4%

4%

4%

Other Net Income (% of revenue)

0.07%

0.07%

0.07%

0.07%

0.07%

0.07%

0.07%

Exhibits - Page 3 of 8

Delia Mazilu, Mihai Mazilu

Chipotle Mexican Grill, Inc. (NYSE: CMG) Coverage Initiation Report

Exhibit 4 Terminal Value Calculation

Gordon Growth
Residual Cash Flow 2016
Terminal Growth Rate
WACC
Terminal Value

170,220
3.5%
6.688%

$ 5,526,291

EBITDA Multiples Approach

QSR Avg.
EBITDA 2016
$
350,536
Residual CF 2016 $
170,220
Multiplier
10.36x
Terminal Value
$
3,629,799
Implied Growth
1.91%

Fast Casual Avg. Casual Dining Avg.

$
350,536 $
350,536
$
170,220 $
170,220
11.74x
9.87x
$
4,115,292 $
3,459,789
2.45%
1.69%

Comparables Avg.
$
350,536 $
$
170,220 $
10.54x
$
3,695,650 $
1.99%

BJ's
350,536
170,220
16.09x
5,640,123
3.56%

TEV/EBITDA LTM
Quick Service Restaurants
McDonald's Corp. (NYSE:MCD)

10.02x

Yum ! Brands, Inc. (NYSE:YUM)

10.69x

Quick Service Restaurants Average

10.36x

Fast Casual Restaurants

Buffalo Wild Wings Inc. (NasdaqGS:BWLD)

9.28x

Panera Bread Co. (NasdaqGS:PNRA)

14.20x

Fast Casual Restaurants Average

11.74x

Casual Dining Resutaurants

California Pizza Kitchen Inc. (NasdaqGS:CPKI)

6.67x

P.F. Chang's China Bistro, Inc. (NasdaqGS:PFCB)

6.85x

BJ's Restaurants, Inc. (NasdaqGS:BJRI)

Casual Dining Restaurants Average

Average of all com parables

16.09x
9.87x

10.54x

Exhibits - Page 4 of 8

Delia Mazilu, Mihai Mazilu

Chipotle Mexican Grill, Inc. (NYSE: CMG) Coverage Initiation Report

Exhibit 5 Sale of Applebees International to IHOP Transaction Details

Company name

BvDEP ID Number

APPLEBEE'S INTERNATIONAL INC.

US431461763

Country
Code
US

Activity

Deal
Enterprise
value

Restaurant operator

Financial information on Applebee's International Inc. :

Consolidated
12/31/2006

Deal

12 months

value

Deal
Equity
value

USD

Multiples

Multiples

Multiples

Deal
Estimated
Enterprise
value
Multiples

1,337,921,000.00

1.57

1.48

1.57

1.59

EBITDA:

140,305,000.00

14.97

14.11

14.97

15.20

EBIT:

130,784,000.00

16.06

15.14

16.06

16.31

Profit before tax:

122,147,000.00

17.19

16.21

17.19

17.46

80,906,000.00

25.96

24.47 -1

25.96

26.36

Total assets:

935,456,000.00

2.24

2.12

2.24

2.28

Shareholders funds:

486,654,000.00

4.32

4.07 -2

4.32

4.38

2,032,203,591.28

1.03

0.97

1.03

1.05

Exchange Rate: USD/USD

Turnover (operating revenue):

Profit after tax:

Market capitalisation at month-end:

1.00

(1) P/E ratio

(2) Price to book value
(3) Ebitda displayed for banks is the Pre-Impairment Operating Profit (line 10190 on Bankscope)

Exhibits - Page 5 of 8

Delia Mazilu, Mihai Mazilu

Chipotle Mexican Grill, Inc. (NYSE: CMG) Coverage Initiation Report

Exhibit 6 Market Comparables

Valuation
09 P/E

10 P/E

Growth
EV/EBITDA
LTM

Unit

Same Store

Margins
EPS

EBITDA

EBIT

Net

Implied Equity Valuation

EBITDA
Earnings
Multiple
Multiple

Quick Service Restaurants

McDonald's Corp. (NYSE:MCD)

16.15x

16.94x

10.02x

Yum ! Brands, Inc. (NYSE:YUM)

15.90x

21.60x

10.69x

Average

16.03x

19.27x

10.36x

Buffalo Wild Wings Inc. (NasdaqGS:BWLD)

24.14x

21.94x

9.28x

Panera Bread Co. (NasdaqGS:PNRA)

25.20x

29.96x

14.20x

Average

24.67x

25.95x

11.74x

0.8%
2.1%

5.0%
2.0%

10.4%
7.2%

35.6%
21.5%

30.3%
16.3%

20.5% $
10.2% $
$

3,640,241
3,884,307
3,762,274

$
$
$

3,031,938
3,865,990
3,448,964

14.6%
5.3%

0.6%
7.9%

24.3%
30.2%

15.9%
16.5%

9.5%
12.0%

6.3% $
7.3% $
$

3,370,675
5,162,923
4,266,799

$
$
$

3,926,843
5,362,271
4,644,557

-2.4% N/A
2.3%
17.7%
5.6%
70.8%

9.0%
11.4%
11.7%

3.2%
5.2%
6.1%

-0.1% $
3.8% $
4.5% $
$

2,419,909
2,485,479
5,851,408
3,585,599

N/A
$
4,562,226
$
9,865,433
$
7,213,829

20.5% $
7.5% $
-0.1% $

5,851,408
3,830,706
2,419,909

$
$
$

Fast Casual Restaurants

Casual Dining Resutaurants

California Pizza Kitchen Inc. (NasdaqGS:CPKI)

35.24x

N/A

6.67x

P.F. Chang's China Bistro, Inc. (NasdaqGS:PFCB)

22.87x

25.49x

6.85x

BJ's Restaurants, Inc. (NasdaqGS:BJRI)

36.89x

55.12x

16.09x

Average

31.67x

40.31x

9.87x

36.89x
25.20x
15.90x

55.12x
28.51x
16.94x

16.09x
10.54x
6.67x

14.6%
4.9%
0.0%

7.9%
3.0%
-2.4%

70.8%
26.8%
7.2%

35.6%
17.4%
9.0%

30.3%
11.8%
3.2%

25.39x

41.15x

21.00x

13.49%

9.40%

42.80%

19.8%

16.0%

High
Average
Low

Chipotle Mexican Grill Inc. (NYSA:BWLD)

0.0%
1.6%
9.8%

9,865,433
5,102,450
3,031,938

9.7%

The Most Appropriate Com parable

BJ's Restaurants, Inc. (NasdaqGS:BJRI)

CMG Metrics
Interest Bearing Debt
EBITDA (EOY 2010)
Earnings (EOY 2010)

$ 9,825
$ 364,278
$ 178,981

Exhibits - Page 6 of 8

Delia Mazilu, Mihai Mazilu

Chipotle Mexican Grill, Inc. (NYSE: CMG) Coverage Initiation Report

Exhibit 7 Football Field Valuation Graph

Football Field
$700.00

$600.00

Price per Share

$500.00

$400.00
$310.87

$300.00
$236.15
$184.38

$200.00

$171.53

$130.89

$236.15

$171.53

$100.00
$84.30

$278.00
Current, $274.00

$76.25

$95.54

$114.87

$0.00

Exhibits - Page 7 of 8

Delia Mazilu, Mihai Mazilu

Chipotle Mexican Grill, Inc. (NYSE: CMG) Coverage Initiation Report

Exhibit 8 Benchmarking Against Select Competitors

QSR
Worst
YUM

Best
MCD

Avg

Fast Casual
Worst
Best
PNRA
BWLD

Avg

Casual Dining
Worst
Best
CPKI
BJRI

Avg

Margin Analysis
Gross Margin %
EBITDA Margin %
EBITA Margin %
EBIT Margin %

Marketing %
Net Working Capital %
Depreciation & Amort %

25.6%
19.0%
14.0%
13.8%

36.7%
31.8%
26.5%
26.5%

31.1%
25.4%
20.3%
20.2%

33.5%
15.2%
10.3%
10.2%

25.6%
14.3%
8.7%
8.6%

29.6%
14.8%
9.5%
9.4%

18.8%
10.3%
4.5%
4.5%

19.2%
10.0%
5.0%
5.0%

18.7%
10.4%
4.9%
4.9%

5.2%
-5.3%
0.0%

3.4%
3.7%
0.0%

4.3%
-0.8%
0.0%

1.3%
5.5%
5.1%

3.3%
10.6%
5.7%

2.3%
8.1%
5.4%

1.0%
-12.9%
5.8%

0.8%
7.6%
5.0%

0.8%
-3.0%
5.5%

5.3%
9.3%
9.2%

6.1%
16.5%
18.2%

5.7%
12.9%
13.7%

26.9%
21.6%
21.6%

27.0%
40.5%
40.5%

27.0%
31.1%
31.1%

12.4%
-1.5%
-1.5%

28.6%
27.0%
27.0%

19.2%
11.1%
11.8%

5 Years CAGR
Total Revenue
Earnings from Cont. Ops.
Net Income

CHIPOTLE
Gross Margin %
EBITDA Margin %
EBITA Margin %
EBIT Margin %

Marketing %
Net Working Capital %
Depreciation & Amort %

37.7%
19.8%
16.0%
16.0%
1.4%
10.6%
3.8%

5 Years CAGR
Total Revenue
Earnings from Cont. Ops.
Net Income

23.9%
36.6%
36.6%

Exhibits - Page 8 of 8