Real-Life Example: Relative Valuation of Chipotle (CMG)

This example demonstrates the steps involved in using multiples for relative valuation, using Chipotle Mexican Grill (CMG) as the target company.

Goal: Estimate the value of Chipotle (CMG) using relative valuation techniques.

Step 1: Understand the Target Company (Chipotle - CMG)

• Business Overview: Chipotle operates a chain of fast-casual restaurants serving a focused menu of burritos, tacos, bowls, and salads. It emphasizes fresh, high-quality ingredients and a customizable ordering experience.
• Industry: Restaurant (Fast Casual)
• Financial Performance (Recent Trends): Revenue has been growing, recovering from past food safety issues. Profitability is also improving.
• Key Drivers: Same-store sales growth, new restaurant openings, food costs, labor costs.
• Qualitative Factors: Strong brand reputation (though previously damaged), focus on sustainability, and customizable menu options.

Step 2: Select Comparable Companies:

• Based on industry, business model, and size, we select the following comparable companies:
  • McDonald's (MCD): Although larger, it operates in the broader fast-food industry and is a well-established company.
  • Starbucks (SBUX): Similar in that it is a large chain emphasizing a particular product category and customer experience.
  • Domino's Pizza (DPZ): A successful restaurant chain, but with a delivery-focused model.
  • Wendy's (WEN): a Quick Service Restaurant offering dine-in, take-out and delivery services
• Justification: These companies are publicly traded, operate in the restaurant/food service industry, and have readily available financial information.

Step 3: Calculate Relevant Multiples:

• We'll focus on two key multiples:

  • P/E (Price-to-Earnings Ratio): Market Cap / Net Income
  • EV/EBITDA (Enterprise Value to EBITDA): Enterprise Value / EBITDA

• Data (Using Recent Financial Data - Trailing Twelve Months): These are for illustrative purposes only. Please find current data when performing your own analysis.

  Company	Market Cap (Billions)	Net Income (Billions)	EBITDA (Billions)	Debt (Billions)	Cash (Billions)
  CMG	$50	$0.7	$1.2	$1	$1.3
  MCD	$200	$7.5	$12	$40	$5
  SBUX	$120	$4.5	$7	$15	$3
  DPZ	$20	$0.5	$0.8	$4	$0.5
  WEN	$5	$0.2	$0.5	$2	$0.2

• Calculate Multiples:

  Company	P/E	EV/EBITDA
  CMG	71.4	40.83
  MCD	26.67	16.25
  SBUX	26.67	18.86
  DPZ	40	30.63
  WEN	25	15

  EV Calculation = Market Cap + Debt - Cash

Step 4: Analyze and Adjust Multiples:

• Descriptive Statistics: We have a range of P/E ratios from roughly 25 to 71.4 and EV/EBITDA from 15 to 40.83.
• Identify Outliers: Chipotle's P/E and EV/EBITDA are significantly higher than the others, suggesting it is either overvalued or has significantly higher growth expectations built into its price.

NOTE: For simplicity, we won't make detailed adjustments in this example, but in a real valuation, you would adjust the multiples based on growth rate differences, risk, etc.

Step 5: Apply Multiples to the Target Company (CMG):

• We will take the median of the comps, excluding Chipotle to prevent circularity:

Median P/E = (26.67 + 26.67 + 40 + 25) / 4 = 29.585 Median EV/EBITDA = (16.25 + 18.86 + 30.63 + 15) / 4 = 20.185

• Valuation Based on Median P/E:

  • Implied Market Cap of CMG = Median P/E * CMG Net Income = 29.585 * $0.7 Billion = $20.71 Billion

• Valuation Based on Median EV/EBITDA:

  *   First, find Enterprise Value EV = Median EV/EBITDA * CMG EBITDA = 20.185 * $1.2 Billion = $24.222 Billion
  
  *Then, Market Cap = EV - Debt + Cash = $24.222 - $1 + $1.3 = $24.52 Billion
  

Step 6: Evaluate and Conclude:

• Range of Values: Based on this simplified analysis, we have a range of potential market cap values for CMG:
  • Based on P/E: $20.71 Billion
  • Based on EV/EBITDA: $24.52 Billion
• Comparison to Actual Market Cap: CMG's actual market cap is $50 billion. Based on this simplified relative valuation, CMG appears significantly overvalued relative to its peers.

Important Considerations:

• Simplification: This is a highly simplified example. A real valuation would involve much more rigorous comparable selection, detailed adjustments, and sensitivity analysis.
• Data Accuracy: Always use the most up-to-date and accurate financial data.
• Qualitative Factors: Consider qualitative factors that may justify a premium or discount to the valuation range.
• Multiple Valuation Methods: Compare the relative valuation to a DCF valuation to get a more complete picture of CMG's worth.

Conclusion:

This example demonstrates the basic steps involved in using multiples for relative valuation. In this case, our analysis suggests that Chipotle may be overvalued based on its current P/E and EV/EBITDA multiples compared to its peers. However, further analysis is needed to confirm this conclusion.