CMG @ End of 2016

Investment Analysis Clubs Saul’s Investing Discussions
1

Fools,

Ever since Chipotle has been a public company, its stock price has been over-priced and the prospective future returns muted as a result.

Many people project the existing business out into the future, without considering future options that, once having occurred, have a significantly positive impact on the business.

Just a sampling of things that the market may not fully consider include:
• Price increases without an impact on demand
• Increases in Throughput & Revenues per Restaurant
• Shop House/Pizzeria Locale/Other Undefined
• More Chipotle restaurants than expected
• Power of the Brand – Food with Integrity
• Catering/Breakfast/Other
• Valuing Employees & Promoting From Within

Given Chipotle’s future prospects and risk profile, I think it’s a very good investment right now.

Sales (in millions) are increasing nicely


Rev	Mar	Jun	Sep	Dec	Year
2010	410	467	477	483	1,836
2011	509	572	592	597	2,270
2012	641	691	701	699	2,731
2013	727	817	827	844	3,215
2014	904	1,050	1,084	1,070	4,108
2015	1,089				1,089

YoY	Mar	Jun	Sep	Dec	Year
2010					
2011	24.3%	22.4%	24.1%	23.7%	23.6%
2012	25.8%	20.9%	18.4%	17.2%	20.3%
2013	13.4%	18.2%	18.0%	20.7%	17.7%
2014	24.4%	28.6%	31.1%	26.7%	27.8%
2015	20.4%

Much of the increases in sales is a result of increased traffic & price increases (resulting in nice comps) as well as store growth.

However, the number of stores is increasing a relatively constant clip, albeit a bit slower rate than in the past. The comps make up the slack.


#Rest	Mar	Jun	Sep	Dec
2010	976	1,001	1,023	1,084
2011	1,095	1,131	1,163	1,230
2012	1,262	1,316	1,350	1,410
2013	1,458	1,502	1,539	1,595
2014	1,637	1,681	1,724	1,783
2015	1,831			

YoY	Mar	Jun	Sep	Dec
2010				
2011	12.2%	13.0%	13.7%	13.5%
2012	15.3%	16.4%	16.1%	14.6%
2013	15.5%	14.1%	14.0%	13.1%
2014	12.3%	11.9%	12.0%	11.8%
2015	11.9%			

COMPS	Mar	Jun	Sep	Dec
2010	4.3%	8.7%	11.4%	12.6%
2011	12.4%	10.0%	11.3%	11.1%
2012	12.7%	8.0%	4.8%	3.8%
2013	1.0%	5.5%	6.2%	9.3%
2014	13.4%	17.3%	19.8%	16.1%
2015	10.4%

Below is a table of Operating Income. It is increasing at a much faster rate than sales.


OpInc	Mar	Jun	Sep	Dec	Year
2010	61	75	78	74	288
2011	75	84	98	94	351
2012	102	134	118	102	456
2013	120	146	137	129	532
2014	136	180	207	188	711
2015	198				198

YoY	Mar	Jun	Sep	Dec	YoY
2010					
2011	22.1%	11.9%	25.9%	26.9%	21.7%
2012	36.6%	59.5%	20.1%	8.9%	30.0%
2013	17.4%	9.2%	16.6%	26.3%	16.8%
2014	13.0%	23.1%	51.2%	45.5%	33.5%
2015	45.8%

The same is true for net income (EPS, YoY Growth & TTM below).


EPS	Mar	Jun	Sep	Dec	Year
2010	1.19	1.46	1.52	1.47	5.64
2011	1.46	1.59	1.90	1.81	6.76
2012	1.97	2.56	2.27	1.95	8.75
2013	2.45	2.82	2.66	2.53	10.46
2014	2.64	3.50	4.15	3.84	14.13
2015	3.88				3.88

YoY	Mar	Jun	Sep	Dec	Year
2010					
2011	22.7%	8.9%	25.0%	23.1%	19.9%
2012	34.9%	61.0%	19.5%	7.7%	29.4%
2013	24.4%	10.2%	17.2%	29.7%	19.5%
2014	7.8%	24.1%	56.0%	51.8%	35.1%
2015	47.0%				

TTMEPS	Mar	Jun	Sep	Dec
2010				5.64
2011	5.91	6.04	6.42	6.76
2012	7.27	8.24	8.61	8.75
2013	9.23	9.49	9.88	10.46
2014	10.65	11.33	12.82	14.13
2015	15.37

We get all of this and over 530 million of cash on the balance sheet while operating cash flows have accelerated and a share count that is lower today than it was in March, 2010. Monty and Steve may make a lot of money. But they aren’t screwing shareholders by increasing share count.

Also, the only significant long-term liabilities include rent (that provides future value), and this number can be covered twice by the cash on hand.


OpCF	Mar	Jun	Sep	Dec
2010	60	69	67	93
2011	68	106	116	120
2012	29	141	123	126
2013	125	143	121	140
2014	180	181	189	132
2015	243			

DilShrs	Mar	Jun	Sep	Dec
2010	31.81	31.80	31.63	31.70
2011	31.72	31.76	31.83	31.78
2012	31.85	31.95	31.85	31.49
2013	31.23	31.18	31.30	31.43
2014	31.49	31.47	31.55	31.54
2015	31.59			

Month	EPS	TTMEPS	QoQ Gr	Hi	Lo	Close	P/E	P/E Hi	P/E Lo
Mar-10	1.19			$117	$86	$113			
Jun-10	1.46			$155	$113	$137			
Sep-10	1.52			$178	$127	$172			
Dec-10	1.47	5.64		$263	$171	$213	37.7	46.6	30.4
Mar-11	1.46	5.91	22.7%	$275	$213	$272	46.1	46.5	36.1
Jun-11	1.59	6.04	8.9%	$309	$250	$308	51.0	51.1	41.3
Sep-11	1.90	6.42	25.0%	$347	$272	$303	47.2	54.0	42.3
Dec-11	1.81	6.76	23.1%	$348	$285	$338	50.0	51.5	42.2
Mar-12	1.97	7.27	34.9%	$427	$336	$418	57.5	58.7	46.3
Jun-12	2.56	8.24	61.0%	$442	$370	$380	46.1	53.7	44.9
Sep-12	2.27	8.61	19.5%	$405	$277	$318	36.9	47.0	32.2
Dec-12	1.95	8.75	7.7%	$323	$234	$297	34.0	36.9	26.7
Mar-13	2.45	9.23	24.4%	$335	$266	$326	35.3	36.3	28.8
Jun-13	2.82	9.49	10.2%	$379	$317	$364	38.4	40.0	33.4
Sep-13	2.66	9.88	17.2%	$430	$362	$429	43.4	43.5	36.7
Dec-13	2.53	10.46	29.7%	$550	$420	$533	50.9	52.6	40.2
Mar-14	2.64	10.65	7.8%	$623	$481	$568	53.3	58.5	45.2
Jun-14	3.50	11.33	24.1%	$602	$472	$593	52.3	53.2	41.7
Sep-14	4.15	12.82	56.0%	$698	$576	$667	52.0	54.4	44.9
Dec-14	3.84	14.13	51.8%	$697	$608	$685	48.4	49.3	43.0
Mar-15	3.88	15.37	47.0%	$728	$647	$651	42.3	47.4	42.1
=============================================================================
Jun-15	4.46	16.33	27.4%	$955	$436	$696	42.6	58.5	26.7
Sep-15	4.63	16.81	11.6%	$983	$449	$716	42.6	58.5	26.7
Dec-15	4.40	17.37	14.6%	$1,016	$464	$740	42.6	58.5	26.7
Mar-16	4.55	18.04	17.3%	$1,055	$482	$769	42.6	58.5	26.7
Jun-16	5.23	18.81	17.3%	$1,100	$503	$801	42.6	58.5	26.7
Sep-16	5.43	19.61	17.3%	$1,147	$524	$835	42.6	58.5	26.7
Dec-16	5.16	20.37	17.3%	$1,191	$544	$868	42.6	58.5	26.7

2016P/E	        30	35	40	45
Price	 	$611	$713	$815	$917
Return	        -1%	16%	32%	49%

If one takes the recent price of $617, applies analyst estimates and the midpoint P/E (over the last 2 years), one can expect to see a stock price of $868 by the end of 2016. Naturally, if earnings slow to the point where analyst estimates are only met, one could also expect the multiple to compress. If it goes down to 30, one will lose a little bit in the same time period.

So if the past business performance is any guide to the future, one could bet that Chipotle will do some things during the next 18 months to increase earnings (price increases, better price on meat & avocados, acceleration of the future concepts, operating improvements, etc.). Since December, 2010, there has been only 2 quarters during which the stock price failed to reflect a 40 P/E (they were high 30s), which would result in a return in excess of 30% during this time period.

Naturally, this is not the 30% annually that Saul likes to get. But it’s a decent return for a proven company with fanatical customers and a long runway of growth ahead of it.

DJ
Disclosure: Chipotle is my largest position.

32 Likes
2

DJ,

FWIW, I sold my shares in CMG a few months ago after being a shareholder for over 8 years. My decision was based on my following opinions:

  1. that growth would inevitably slow as the company gets larger

  2. when growth slows the high P/E would no longer be sustainable

Sure, I could have hoped that CMG would defy these opinions and I struggled with my decision to sell for about 6 months before I finally pulled the trigger. And paying taxes on a position that is more than 90% profit is painful. Ultimately, I decided that there are other investments that I am more confident will grow going forward.

Chris

13 Likes
3

Chris,

There were times when I considered selling (I actually sold some a few years ago to buy MAKO in an IRA - bad decision). In fact, my portfolio would be growing really well this year if not for the slump in CMG.

However, this is an investment that I feel really comfortable keeping for a very long time. It’s a core investment that I don’t have to worry about and constantly watch.

Naturally, there are a lot of companies that can be bought at a better value. However, I wouldn’t feel quite the same as I do with Chipotle.

Also, I’ve done my field work, having visited about 20 different Chipotle’s in Texas, California, North Carolina, Florida, New York, England and Germany.

I’m convinced that the company will prosper in the long run, despite the high probability that it will do so at a lower rate of return than I’ll get with my investments BOFI and Skyworks.

Perhaps Chipotle will miss by a penny or two and lose another 20%. If so, I’m sure you’d consider buying-in again. Their business performance, certainly makes a case to do so.

DJ

6 Likes
4

Chris,

Maybe it’s been awhile for you, but selling a position which is more than 90% not profit (and thus no taxes on that)… THAT is painful.

paying taxes on a position that is more than 90% profit is painful

-Frick

3 Likes
5

Maybe it’s been awhile for you, but selling a position which is more than 90% not profit (and thus no taxes on that)… THAT is painful.

That’s usually true but not always. I’d have rather have had CMG drop 50% before my sale IF the company that I am using the proceeds to trade into also dropped by the same percentage. General market declined sometimes allow you to switch stocks for the same relative price while lowering current year tax liability versus what the tax liability would have been without the market drop. My focusing on relative price (the relative price between the stock you’re selling and the sock you’re buying) you can be more tax efficient.

3 Likes
6

And paying taxes on a position that is more than 90% profit is painful.

… especially in a state like California, where the state income tax is high (and doesn’t give you a break for long-term capital gains).

Suppose your marginal tax rate for long-term gains is 30% (20% federal + 10% state). If 90% of your position is long-term gains, then your income tax will be 27% (0.30 * 0.90) of your position, leaving you with 73% of your previous value. To get back to your original investment value, you need a 37% gain (27/73) on the after-tax amount. For the new investment to break even with the old investment, you need that 37% plus whatever the old investment would have made in the same time period.

Do you think about this kind of break-even analysis? If so, over what time period do you want your new investment to break even in order to consider selling and re-investing in something new?

There are other reasons you might sell, like if the position is so large that you feel unsafe keeping that large a fraction in a single stock. Or if you think there is significant risk of an outright loss of capital (though that would just lower the break-even point).

It’s easier (for me) to think about reallocating when I’m sitting on a smaller gain (or a loss), so the relative tax burden is less.

-Mark

3 Likes
7

Mark,

Suppose your marginal tax rate for long-term gains is 30% (20% federal + 10% state)

Close. For a US taxpayer, there may also be the healthcare act tax. And the long term capital gains rate is 15% so long as total income is not too high (I think it’s around $400K where it goes up so it’s worth it to stay below $400K in annual income if you are taking long term gains). Tax in California can be as high as 13.3% for high earners.

Do you think about this kind of break-even analysis? If so, over what time period do you want your new investment to break even in order to consider selling and re-investing in something new?

Sure I think about all this stuff. I decided that I would be better off in the long run by exiting CMG and reinvesting. I also waited an extra 2 months before selling much of my AIOCF so I could partially offset this loss against my gain on CMG. I have a couple of other stocks on the chopping block but I will likely exit them in 2016, partially for tax reasons.

Another factor for me is showing income on my tax returns so I can qualify for mortgages. I wish banks would make decisions based on common sense as opposed to a cookie cutter approach which really disadvantages people who do not have W-2 wages. Thus, if I want to get mortgages or refinance existing mortgages then I must realize enough capital gains in order to qualify. This forces me to pay more in taxes but this is more than offset by access to historically cheap capital, especially when I can lock in rates for 30 years. If I can invested this “borrowed” (it’s actually tapping into equity so it’s debatable whether it’s actually borrowed at all) at a higher rate than the interest rate on the mortgage then I am earning this spread every year. So far this has been a great year; I’ve borrowed at 4% while my investments using this 4% money has so far yielded more than 40% YTD. Clearly, one has to be very disciplined to do this as most people who I know would spend any equity that they pull out of a property.

Chris

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