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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.

    CompanyMarket 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:

    CompanyP/EEV/EBITDA
    CMG71.440.83
    MCD26.6716.25
    SBUX26.6718.86
    DPZ4030.63
    WEN2515

    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.

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