Stock: Chipotle Mexican Grill Inc. (NYSE:CMG) PPS: $336.40 Target Price: $406.

50 Recommendation: Buy Team #: 4

Connor Haley Jared Sleeper Linxi Wu
September 25, 2012

Overview of Chipotle - Ingredients of Success

Fast Casual Inventor
New and growing dining concept between fast food and casual dining Speedy service (up to 300 customers/hr.) with higher quality products

Strong Corporate Culture

Food with Integrity Initiative to build loyalty through use of sustainable food Restauranteur program 98% of managers started as entry level hourly crew

Evidence of Success
Metric Market Cap 2006 $1.85bn Present $10.66bn 476% CAGR 37.5%

Restaurant Count
Revenue(TTM)

581
$776mm

1316
$2.27bn

127%
192%

16.0%
21.6%

Profit Margin
RoE Net Income(TTM) Share Price P/E Ratio

4.93%
9.98% $39 mm $58.2 44.53

11.82%
24.22% $262 mm $336.4 40.83

140%
143% 572% 478% -8.3%

17.23%
17.5% 41.4% 37.6% N/A

Valuation Methodology
10-year DCF model with a EV/EBITDA terminal valuation Three scenarios
Bear; Base; Bull

Key Inputs:
Store count model/saturation Comparable locations sales growth Margin assumptions Terminal Valuation (EBITDA Multiple)

Discount Rate

Store Count
We estimated the potential market saturation store-count of Chipotle using comparisons to its one saturated market, Colorado We built two ratios, Chipotle/Capita and Chipotle/Taco Bell (to adjust for Mexican food demand), and applied them to all 50 states
State Alabama Arizona Arkansas California Colorado Florida Population 4,802,740 6,482,505 2,937,979 37,691,912 5,116,769 19,057,542 Predicted Stores by Chipotle/Person 67 90 41 523 71 264 Predicted Stores by Chipotle/Taco Bell 66 83 43 422 71 165

Total

4,314

3,004

This matches conservative management estimates from a recent GS conference

Same Store Sales Growth

Chipotles average growth over the past decade was 11.8%
We project a 5% base case value (4.3% bear case and 5.7% bull case)

Comparable Restaurant Sales (6 yr. avg.)

5.0 4.3 4.3 5.4 5.7 6.0

7.1

4.4

4.5

2.6
1.9

3.0

Margin Projections
Continued steady decreases in occupancy and labor costs as a % of revenue
Driven by same store sales growth Leases for most existing restaurants are fixed for a min. of 5 years Labor costs are also diminishing with same stores sales growth

Higher food and packaging costs as a % of revenue

Management has guided higher food prices for the second half of 2012 and 2013 High quality local food sourcing will be strained by rapid growth

Year

2009

2010

2011

Q2 2012

2012P

2016P

2021P

EBIT Margin

13.4%

15.7%

15.4%

19.36%

18.3%

18.4%

18.2%

Discount Rate
9.18% discount rate calculated using Capital Asset Pricing Model
Historical market return of 10% 5 year annualized beta of .9 Risk free rate of 1.86% (10 year treasury yield)

Terminal Value
EV/EBITDA Assumptions
13.8 11.5 11.5 11.7 12.0 12.3 12.4 11.0 16.0 14.4 14.4

10.0 7.8 8.2 8.3 8.5

10.0

10.4

10.5

8.7

9.2

Valuation Summary
Bear U.S. Market Saturation Store Count: ~2500 Same Store Sales Growth (Avg.): 4.3% EBIT Margin (Avg.): 17.2% Terminal EV/EBITDA Multiple: 10 Implied Valuation: $290.83 Premium to current PPS: -13.55% Base ~3000 5% 18.3% 11 $406.50 20.84% Bull ~3500 5.7% 19.2% 12 $523.39 65.48%

Risks
Increasing competition
Taco Bell launched their Cantina Menu on July 5th, which closely resembles CMGs offerings

Overexpansion
Overaggressive growth plans would threaten brand image if mgt. cannot maintain managerial quality

Food Costs
Significant food price inflation can eat into margins

Macroeconomy
Expansion rate and same store sales both depend partially on broader macroeconomic factors

Thesis Summary and Recommendation

CMG is one of the greatest growth stories in the market
At a little over 1300 current stores, and saturation point at 3000+, CMG is in the early innings of growth

We think the value of this growth has been underestimated

Even using conservative assumptions for saturation point, SSS, margins, and terminal value in our base case, we conclude CMG is worth $406.50 (20.84% undervalued) Free call options: breakfast, international expansion, and ShopHouse

Questions?
As long as the same-store sales are on the increase, the company is not crippled by excessive debt, and it is following its expansion plans as described in its reports, it usually pays to stick with the stock. -Peter Lynch