Chipotle

Mexican Grill Pitch

Kyleyboy
Chipotle Mexican Grill is a fast casual Mexican establishment with more than 1316 locations, most of which are located in the United States. Chipotle has a ticker symbol of CMG and is located on the NYSE. CMG is currently trading at around 325 dollars per share. Chipotle has a market cap of about 10 billion. We are recommending a BUY rating with a price target of 360-375. Important financials: PE Ratio: 36.65 EPS: $3.63 Margin: 27.1% increase of 11% since 2011 Net income: 278 million increase of 29 percent since 2011 Comp Sales: 7.1% Revenue $2.73 billion Diluted earnings per share was $8.75, an increase of 29.4% since 2011 Opened 183 new restaurants Why to invest in Chipotle: Strong Management team Management knows their customer better than almost company out there. The management team has kept itself far away from any scandal that could hurt its relationship with their customers. Chipotle held back from raising prices for customers despite food price increases. This shows obvious care for what the customers think. This leads me to believe that they will continue to keep the high quality food their customers expect instead of selling out for better margins. Chipotle runs on their perception of sustainability and healthy eating habits. They are very selective about where they get their food from and their customers know that. This will help significantly in the startup of the new Shop House brand that has been in the works at Chipotle lately. A successful business is almost always started after doing proper market research and understanding the target market, and whether or not the creation of the business is viable and adding value. Chipotles management team has proven that they care about and understand the customer and I believe that

Shop house will be a success.

Expansion opportunities

While Chipotle cannot grow forever there are still many opportunities to continue growth in other countries.

Improvement in margins and

Food prices hurt CMGs margins last

Chipotle does not franchise out any locations and chooses to do all of their expansion by themselves. This allows them to ensure quality control but it also allows them to create standards for expansion. It prevents any issue with overexpansion into improper markets. Their culture is very finite and specific and it allows the management to make good decisions on expansion. The main standard that CMG runs on is its proven markets expansion plan. Proven markets are those where the Chipotle brand is well known, and where we can accurately predict how well new restaurants will perform. Which brings me to expansion opportunities in Canada. Chipotle started its first restaurant in Denver, a very health driven city; in fact it is often considered the healthiest city in the united states. Denver is a very similar to Canada. A recent study published by USA today showed that Americans on average are 42% more likely to have diabetes and 32% more likely to have high blood pressure. This percentage is massive considering the weight-problem epidemic in the US. From these statistics we can either make the assumption that Canadians care about their health more than Americans. Or we can assume that there is something up in that Canadian water that makes them less fat. Thats for you to decide. Because of this assumption, it is clear that CMG would fit very nicely in this huge Canadian market especially because CMG fits the niche of a healthy sustainable and high quality lifestyle. Of the two places in the western hemisphere that Id expect Chipotle to thrive most itd be Canada and Denver. When a company first begins it goes through many stages. In marketing often

transaction driving marketing as well as brand building in catering and in store sales.

year. Also, now that CMG has built its brand awareness it can now harness some of the awareness to improve transactions especially in the catering area.

companies strive to develop a brand that is well known and clear. We see this with most any successful company that sells products. There is a certain amount of awareness surrounding it. At the beginning it is tough to create awareness and it does not often directly translate to sales for the company as much as it does awareness. However after sufficient awareness is created the awareness can do a lot of the leg work it self once the awareness budget can be spent on transactional driven marketing. Hopefully this can help to improve the rate in which customers come into the store and buy food. Companies like Starbucks do a great job of transactional driven marketing and I believe that CMG has a management team capable of SBUX marketing. While food prices will likely remain stable and not decrease over time it is now an issue that Chipotle is aware of and will not likely be a problem down the line for margins. Chipotle plans to raise burrito pricing by 25 cents to offset the problems. Food assumptions are based on the food pricing trend here http://www.fao.org/worldfoodsituation/wfshome/foodpricesindex/en/ Catering will be a big part of the upcoming earnings and for similar companies like Qdoba it relates to 15% of their earnings. However Chipotle has an even better looking opportunity for catering because of the way that it sells itself and the nature of health in cities. I am assuming, and would like to look into where the bulk of Chipotles locations are compared to Qdoba. My assumption without much statistics is that Chipotle tends to locate itself in the middle of larger cities on average because they can insure better traffic. If Management was smart they would know this and do this, and when a company is

located in the city it will see more traffic in every way, especially catering when businesses will need food for lunches, business meetings, events etc. Chipotle will be a very good option for the average business especially because on average those that live in cities are more liberal and health conscious.. The specifics of this question I have posed would be good to ask to IR. You can see statistics of city goers liberal tendencies in our previous Obama election picture below.http://cdn.urbancincy.com/wpcontent/uploads/2012/11/2012-ElectionResults-By-County.jpg

http://www.qsrmagazine.com/menuinnovations/beyond-your-fourwalls?page=2

Why not to invest in Chipotle Valuation Valuation is not fantastically attractive Current PE ratio is around 36 however from what we have seen in stocks like amazon lately PE ratio is not a great metric to look at in fast growing, popular companies. CMG is priced like a growth company. Food prices could continue to spike and cause major problems in food costs for consumers. Quality would be sacrificed to improve margins and that would absolutely kill Chipotle. Based on the target market. Taco Bell would win this one.

Food prices

Potential future continuation of food prices

Growth

Growth may be overstated

While there is tons of opportunity for growth there is a certain amount of trust that needs to be put into management in order to assure that we will actually grow according to plan or even beat expectations. There is a lot of opportunity but it is all about seizing the day and grabbing Canada by the balls. Market risks involving the S&P dropping could also be a problem for growth and store sales, which could affect earnings and create a problem. If earnings miss the stock will likely drop significantly based on what I have seen in companies that continuously beat and then miss for one quarter. However those opportunities are my favorite buy times.

After all is said and done CMG, in my opinion, is a fantastic company that is a good buy opportunity, despite its mildly unattractive valuation.