CMG adjusted EPS

CMG doesn’t report adjusted EPS. I went through the last several years of earnings and adjusted their GAAP earnings for share based compensation which is already considered in their diluted share count. I added back the expense for each quarter (Q1 2012 through Q3 2014) by taking the share based compensation number reported on the Statement of Cash Flows multiplying by 0.65 to account for the tax implications (assuming CMG tax rate is 35%) and dividing by the average number of fully diluted share count for the quarter.


Quarter	Date	        EPS	Adj EPS	Shares  Share-based Comp
Q1 2012	3/31/2012	1.97	2.38	31.846	20.24
Q2 2012	6/30/2012	2.56	2.91	31.951	17.43
Q3 2012	9/30/2012	2.27	2.57	31.846	14.582
Q4 2012	12/31/2012	1.95	2.20	31.486	12.015
Q1 2013	3/31/2013	2.45	2.77	31.229	15.387
Q2 2013	6/30/2013	2.82	3.22	31.176	18.946
Q3 2013	9/30/2013	2.66	3.00	31.296	16.289
Q4 2013	12/31/2013	2.53	2.80	31.425	13.035
Q1 2014	3/31/2014	2.64	3.20	31.486	27.359
Q2 2014	6/30/2014	3.5	4.20	31.474	34.042
Q3 2014	9/30/2014	4.15	4.58	31.502	20.755

The above table is the result. Based on the result, I get a TTM P/E of 49 versus 56 for TTM GAAP EPS.

Chris

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Hi Chris,

I 'm guessing CMG is one of your core holdings.

I have only done some cursory analysis on CMG, so may be my questions and concerns are completely misplaced.

o It looks like their revenue growth has been trending down for the past 3- to 4 years. The YoY revenue growth numbers (off the top of my head) have been 23%, 20%, and most recently 17%.

o I see the earnings growth has been good but earnings can forever be ahead of revenue growth. This looks like a problem to me, especially when one considers the 50x multiple for CMG.

o They have 1600+ stores in the US. I know they are looking to expand via other concepts, but 1600+ stores looks like a fairly “mature” concept. There’s the international expansion opportunity, i.e., they can try to be the next Macca’s but there too it appears the initial forays into international markets (Europe) has been met with cold reception. In Australia, for example, we have Guzman y Gomez (https://www.guzmanygomez.com), which is doing pretty well, so I see that this concept has potential elsewhere but it pretty untested.

So, the question is – Why do you think investors should be happy to pay a premium multiple for CMG at this stage of its evolution?

Anirban

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Yes, Anirban, CMG is about 3.5% of my portfolio. I have not added any shares since my initial purchase…I think it was 10 years ago. I would not buy shares at this valuation, but I will not sell because my shares are in a taxable account. I would need realized losses to offset my large gain (>90% of the value of my shares is an unrealized gain). I might change my mind if the P/E hit 65-70.

I think the number of locations can double in the US. In addition, they are testing Asian food and Pizza concepts which could further increase growth.

I also eat at Chipotle on average once a week and that lines are always out the door…and they move those lines so rapidly. Every time I eat there I have to smile because I could probably pay for lunch every day for life from my CMG investment.

Chris

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I’m not Chris, but my thoughts on CMG being a mature concept are as follows:

I actually think Chipotle is quite small in the grand scheme of things. At 1,600 locations, it is true that they are much larger than Shake Shack, Zoe’s, Chuy’s, or any of the other “up and coming” fast casual chains.

However…1,600 isn’t all that many when you look closely.

In 2013: Subway had 25,000 locations in the US, McDonalds has 14,000, Burger King had 7,200, and Wendy’s had 6,100 (http://ezlocal.com/blog/post/10-largest-fast-food-chains-201…) - Chipotle is #21 on that list! Obviously these are not perfect comparisons. However, it gives a sense of the enormity of the addressable market. I believe Chipotle could double their store count with relative ease. They do not franchise, and have been very careful and deliberate in their expansion.

In addition, Chipotle is cultivating two other concepts which have a similar QSR design. One is called Shophouse, which is currently being marketed as an “Southeast Asian Kitchen”, which is being very gradually expanded and currently has 9 locations between LA and DC. The other is Pizzeria Locale, a recent partnership with a lone restaurant in Denver that has a similar vibe to Chipotle and is about to open a 2nd location (http://www.kansascity.com/news/business/biz-columns-blogs/ci…). If either of these concepts reach even a fraction of the success of the original Chipotle concept, then the stock could have a long way to run - I could certainly see it surpassing MCD in market cap someday.

A (lengthy) personal anecdote for anyone interested: I recently graduated from Kenyon College, a small liberal arts school in rural Ohio. A Chipotle just opened in the neighboring town 2 or so years ago, and it is constantly packed, primarily with local residents (and a good number of college students as well). Prior to that, the nearest Chipotle had been 45 minutes away, and students would organize carpools in order to go pick up large orders for groups of friends. Chipotle only just opened locations in Amherst, Massachusetts and Boone, North Carolina - both well known college towns where I have friends. They were simply ecstatic at the fact that Chipotle finally opened up in their areas, and they report that they are as packed as every other Chipotle they have ever been to. That is a kind of brand power that is difficult to find, particularly in the restaurant industry, and I think all of these things make CMG worth a premium multiple.

Nat
Very long CMG + Steve Ells

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Thanks Nat.

That was an insightful post, at least to me.

Anirban

I would not buy shares at this valuation, but I will not sell because my shares

Hi Gaucho!

Ok, so at what valuation would you buy CMG. I love the concept, creative and intelligent management and food but haven’t been able to bring myself to buy in, and yet, it the price keeps going higher. (Once I did see a point of entry but I was out of cash.)

Hope all is well with you and all the other great commenters/participants on this board.
Mykie
PS if anyone is still holding SZYM (I am as well as some options) I believe Black Rock just bought in a 6.1% position very recently but please check the 13G since, I read it and glazed out half way through.

Hi Mykie,

Ok, so at what valuation would you buy CMG?

I would look at the historical P/E range and buy near the bottom of that range. There was an opportunity in 2009 and more recently after Einhorn shorted the stock and it dropped to around $240. I would read Tom E’s (TMF1000) PageX posts on the CMG board to find the P/E range over the past 10 years. Buy near the lower end if it ever gets there again.

Chris