Are Chipotle Mexican Grill, Inc. (NYSE:CMG) Investors Paying More Than Intrinsic Value?
Key ideas
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Using the two-step free cash flow to equity, the fair value estimate for Chipotle Mexican Grill is $39.49.
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The current stock price of $49.83 suggests that Chipotle Mexican Grill is potentially overvalued by 26%
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The analysts’ price target for CMG is $63.50, which is 61% above our fair value estimate.
Does Chipotle Mexican Grill, Inc. (NYSE:CMG)’s July stock price reflect its true value? Today, we’ll estimate the stock’s intrinsic value by projecting its future cash flows and then discounting them to today’s value. We’ll use the Discounted Cash Flow (DCF) model to do this. Before you think you can’t figure it out, read on! It’s actually a lot less complex than you might think.
We generally believe that the value of a company is the current value of all the cash it will generate in the future. However, a DCF is just one valuation indicator among many, and it is not without its flaws. For those who are fans of stock analysis, the Simply Wall St analysis model presented here may be of interest.
Check out our latest analysis for Chipotle Mexican Grill
What is the estimated valuation?
We use the two-stage growth model, which simply means that we consider two stages of the company’s growth. In the initial period, the company may have a higher growth rate and the second stage is generally assumed to have a flat growth rate. To begin, we need to obtain estimates of cash flows for the next ten years. Where possible, we use analyst estimates, but where these are not available, we extrapolate the previous free cash flow from the latest estimate or reported value. We assume that companies with declining free cash flow will slow their rate of decline and companies with growing free cash flow will see their growth rate slow over this period. We do this to reflect the fact that growth tends to slow more in the early years than in later years.
In general, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year free cash flow (FCF) forecast
2025 |
2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
2034 |
|
Leveraged FCF ($ millions) |
1.70 billion US dollars |
1.81 billion US dollars |
2.16 billion US dollars |
2.55 billion US dollars |
2.82 billion US dollars |
3.05 billion US dollars |
3.24 billion US dollars |
3.41 billion US dollars |
3.56 billion US dollars |
3.70 billion US dollars |
Source of growth rate estimation |
Analyst x8 |
Analyst x3 |
Analyst x1 |
Analyst x1 |
East @ 10.62% |
East @ 8.15% |
East @ 6.42% |
East @ 5.21% |
East @ 4.36% |
East @ 3.76% |
Present value (in millions of dollars) discounted at 7.5% |
$1.6k US |
$1.6k US |
$1.7k US |
$1.9k US |
$2,000 US |
$2,000 US |
$2,000 US |
$1.9k US |
$1.9k US |
$1.8k US |
(“Est” = FCF growth rate estimated by Simply Wall St)
Present value of cash flows over 10 years (PVCF) = 18 billion US dollars
The second stage is also known as the terminal value. This is the cash flows of the company after the first stage. For a number of reasons, a very conservative growth rate is used, which cannot exceed that of a country’s GDP growth. In this case, we have used the 5-year average of the 10-year government bond yield (2.4%) to estimate future growth. In the same way as for the 10-year “growth” period, we discount the future cash flows to today’s value, using a cost of equity of 7.5%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = $3.7 billion × (1 + 2.4%) ÷ (7.5% – 2.4%) = $74 billion
Present value of terminal value (PVTV)= Tele / (1 + r)ten= 74 billion US dollars Ă· (1 + 7.5%)ten= 36 billion US dollars
The total value is the sum of the cash flows for the next ten years plus the discounted terminal value, which gives the total value of equity, which in this case is $54 billion. In the last step, we divide the value of equity by the number of shares outstanding. Compared to the current share price of $49.8, the company appears slightly overvalued at the time of writing. Keep in mind, however, that this is just a rough valuation and, like any complex formula, errors are always factored in.
The hypotheses
The main things to consider when calculating a discounted cash flow are the discount rate and, of course, the actual cash flows. If you disagree with these results, try the calculation yourself and play around with the assumptions. DCF also doesn’t take into account the possible cyclicality of an industry or the future capital needs of a company. As such, it doesn’t give a complete picture of a company’s potential performance. Since we consider Chipotle Mexican Grill as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which takes into account debt. In this calculation, we used 7.5%, which is based on a leveraged beta of 1.113. Beta is a measure of a stock’s volatility, relative to the market as a whole. We derive our beta from the industry average beta of comparable companies globally, with a limit imposed between 0.8 and 2.0, which is a reasonable range for a stable company.
SWOT Analysis for Chipotle Mexican Grill
Strength
Weakness
Opportunity
Threat
Go forward :
While a company’s valuation is important, it should ideally not be the only piece of analysis you look at for a company. The DCF model is not a perfect stock valuation tool. Instead, it should be viewed as a guide to “what assumptions must be true for this stock to be undervalued/overvalued?” For example, changes in the company’s cost of equity or risk-free rate can have a significant impact on valuation. What is the reason the stock price is above intrinsic value? For Chipotle Mexican Grill, there are three key things you need to evaluate:
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Financial health:Is CMG’s balance sheet healthy? Take a look at our free balance sheet analysis with six simple checks on key factors such as leverage and risk.
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Future benefits:How does CMG’s growth rate compare to its peers and the broader market? Explore the analyst consensus for the coming years in detail by interacting with our free analyst growth expectations graph.
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Other high quality alternatives:Do you like good all-rounders? Explore our interactive list of high-quality stocks to get an idea of ​​what you might be missing!
PS. The Simply Wall St app performs an updated cash flow valuation for every NYSE stock every day. If you want to find the calculation for other stocks, just search here.
Do you have any comments on this article? Are you concerned about its content? Get in touch with us directly. You can also send an email to editorial-team (at) simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to constitute financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. Our goal is to provide you with focused, long-term analysis based on fundamental data. Please note that our analysis may not factor in the latest price-sensitive company announcements or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
Do you have any comments on this article? Are you concerned about its content? Contact us directly. You can also send an email to editorial-team@simplywallst.com
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