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Chipotle Mexican Grill (CMG) Analysis & Valuation

Chipotle Mexican Grill (CMG) LogoI have been following Chipotle Mexican Grill (CMG) for quite some time now, and it didn’t come as a surprise to me that it scored very well in a recent stock screen I made for companies which exhibit high, predictable growth and little debt. Chipotle Mexican Grill’s EPS has grown at a compounded annual rate of 39% over the past five years. Sales have grown at 23% per year. As of Dec. 31, 2012, CMG was trading for $297.46 which translates to a market cap of $9.15 billion.

I will now review the latest annual and quarterly reports in detail to determine if there are any red flags which would preclude an investment in Chipotle. Following that, we will attempt to determine a reasonable estimate for CMG’s current intrinsic value and use that information to set an entry price target.

Detailed Analysis

CMG is an owner and operator of Mexican fast food restaurants which have a core menu consisting of burritos, tacos, and salads. The company does not franchise, and their claim to fame is their focus on high quality ingredients and training of their people. This has brought them a great deal of success thus far. Chipotle Mexican Grill’s most recent annual report was for fiscal year 2011 which ended on December 31, 2011. As that was now over a year ago, we will also pay close attention to the 3rd quarter report, which ended September 30. Following are the key takeaways from both reports.

2011 Annual Report Highlights

  • CMG places an emphasis on naturally raised meat and dairy and locally grown produce. The company believes that this increases the quality, taste, and integrity of its food. There is inadequate supply of naturally raised meat to commit to this goal fully however, and some regions occasionally revert to conventionally raised meat in these cases. This is a potential red flag due to the company’s very ambitious growth aspirations. Will CMG’s suppliers be able to keep up with demand?
  • The company is extremely focused on customer education and engagement. Programs include a web-based program called the Farm Team to educate customers about what makes CMG’s food unique, a Cultivate Festival which drew 17,000 people in Chicago, the production of a short film to expose customers to the benefits of sustainable farming, and finally the establishment of a non-profit organization to assist those who are making efforts in areas such as animal welfare and sustainable farming. Continue reading
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