Grilling the Chipotle Mexican Grill

Well, when I read Alex's post on CMG, I didn't quite believe him. So I decided to do my own detailed DCF and check it out for myself.
I used a 10-year period FCFE, using the following assumptions:

- Revenue growth rate of 50% for 2006 and gradually declining to 22% by 2015.
- Dep & CapEx growth rates of 15%
- Change in WC of .2%
- Tax rate 41% (taken from CMG investor relations page, keep in mind they had a tax loss carry-forward)
- Terminal growth rate 4%
- Cost of Capital of 13.5% (the IPO proceeds were used to retire CMG's debt, and company plans to keep the debt level minimal, so really it's just cost of equity)

Now, under the above assumptions, I get the fair value to be $60.87
Changing a couple variables to more realistic level of:
- Dep & CapEx of 17%
- Cost of Capital of 15%

Value per share drops sharply to roughly $40.

Keep in mind that the analysis is largly dependent on the massive growth factored in. By the end of 2015 the company's revenues would have had ballooned to a whopping $12.3 billion. Even McDonald's revenue of $20b looks challenged...

Using multiples, it's pretty obvious that the company is trading at a high multiple of 80 times estimated earnings (22 for the industry) and a Price/Sales of 2.9 vs a modest .9 for the industry. The company might do just that and catch up to such expectations, but such growth expectations have to be met, for many years to come.

Considering that McDonalds is holding 88% of CMG shares, it's quite interesting to see what would happen once the lock-in period of 180 days ends in July. McDonalds has the right to sell any amount of shares it owns, and just the initial spark of a massive sell-off would send the stock plunging.

Since Monday, the stock has soared 28%. It's something to think about.