Chipotle Mexican Grill - BUSX 301 SECTION 004 PROFESSOR KATHRYN A. DELAHANTY COMPANY AND STOCK VALUE ANALYISIS ASSIGNMENT OCTOBER 22, 2012 Jordan ...
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TOWSON UNIVERSITY
Chipotle Mexican Grill
BUSX 301 SECTION 004
PROFESSOR KATHRYN A. DELAHANTY
COMPANY AND STOCK VALUE ANALYISIS ASSIGNMENT
OCTOBER 22, 2012
Jordan Schwartz
Nick Pycha
James Gaffigan
Zachary Hylton1
BRIEF OVERVIEW
Chipotle Mexican Grill is one of the top Mexican restaurants in the fast casual industry.
Founded in 1993, it has over 1,300 locations in the United States, Canada, United
Kingdom, and Asia. Chipotle prides itself on using ingredients that are fresh and locally
produced. Each of their products is prepared in front of the customer to ensure
customer satisfaction (Moran, 2011).
After analyzing the company’s financials over the past ten years, we have come to the
conclusion that Chipotle Mexican Grill is not a good long term investment. We have
come to this decision based on numerous factors, including fierce competition from
Taco Bell and Qdoba, overvalued stock prices, the legal issues they are currently facing,
and their inability to cope with the economic recession.
FINANCIAL ANALYSIS
Chipotle was owned by McDonald’s until 2005, and only had about 12 restaurants
operating at the time, so there was minimum financial information available.
The following table is Chipotle’s financials over the past five years:
2011 2010 2009 2008 2007
Gross $589,227 $489,405 $378,519 $286,927 $242,569
Profit
Net $214,945 $178,981 $126,845 $78,202 $70,563
Income
Quick 2.951 3.0782 2.6855 2.4999
Ratio
EPS 6.89 5.73 3.99 2.39 2.16
Rev. 0.2362 0.2091 0.14 0.2267
Growth2 (Zack’s, 2012). As you can see, gross profit, net income, and total revenue have been at a constant increase over these past five years. We analyzed two key ratios in order to determine Chipotle’s current financial condition. The quick ratio tells you how fast the company is able to pay off their immediate assets and based on the table above, Chipotle would have no problem paying off some of their short-term obligations. The second ratio we analyzed was the price per earnings ratio which tells us how much investors will make on each share they purchase. To determine the trends that Chipotle had, we analyzed three critical factors: restaurant development, sales growth, and revenue. Restaurant development shows how many new locations Chipotle was able to open up each year as well as how many were being shut down. Chipotle is expected to open between 155 and 165 locations in 2012 which shows a positive trend because the company is growing along with opening more locations than they did in 2011 (Moran,2011). Costs for opening these locations are expected to be around $800,000 for the year, which is equal to the amount spent last year (Moran, 2011). This also shows a positive trend because they are being more efficient with their development expenses. The next trend we analyzed was sales growth. Average sales in 2011 were $2.013 million, which increased from 2010’s sales, which were $1.840 million (Moran, 2011). Although sales have steadily increased over the past five years, inflation in costs of ingredients has contributed to this increase. Since costs of ingredients have gone up, this has caused menu prices to increase 4.6% over the past year. Chipotle’s revenue has increased 23.6% from 2010 to 2011 (Moran, 2011).
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COMPETITORS
There is a lot of competition in the industry of fast casual food; we chose to analyze the
financials of Taco Bell and Qdoba. These companies have major stakes in the market,
and will continue to challenge Chipotle for industry supremacy.
The following tables show the financials of YUM Brands and Jack in the Box; these are
the companies that own Taco bell and Qdoba respectively:
Taco Bell – YUM
2011 2010 2009 2008 2007 2002
Gross $5.904 B $5.315 B $5.056 B $5.209 B $4.967 B $3.81 B
Profit
Net $356 M $274 M $216 M $204 M $231 M $172 M
Income
Quick .83 .87 .65 .47 .656
Ratio
EPS .75 .55 .44 .43 .44 .28
Rev. 15.41% 5.85% (.74)% 3.32% 8.79% 11.76%
Growth
(Zack’s, 2012)
Taco Bell has a trend of growth. Over the past ten years they have been growing at a
constant healthy rate that should draw attention from investors. The company was
successful in meeting their goals and expectations. They are a cornerstone in strength
and a dominant factor in the industry of fast casual food. Revenue growth has done
nothing but increase from year to year, with the exception of 2009. Even though it has
been rough economically over the past couple years, Taco Bell was still able to improve
their net income each year. They prepared for the recent economic struggles and have
successfully targeted portions of the fast casual food market into choosing their
products. Currently Taco Bell accounts for about 50% of the market, 2011 marked the4
eleventh straight year in which YUM Brands has opened more than 1,000 new units
(YUM Brands, 2012).
Qdoba – JACK
2011 2010 2009 2008 2007 2002
Gross $314.55 $348.7 M $416.22 $423.02 $456.8 M $375.2 M
Profit M M M
Net $11.95 M $32.40 M $24.25 M $28.40 M $36.26 M $21.16 M
Income
Quick .76 .84 .77 .96 .57
Ratio
EPS .27 .61 .43 .49 .59 .28
Rev. (1.81) % (2.44) % (12.28) % (.04) % (9.30) % 3.22
Growth
(Zack’s, 2012)
Qdoba is a major competitor to Chipotle; they have been growing and making their
mark on the industry over the past years. Their revenue growth hasn’t been impressive
but it’s not bad enough to be a concern. Qdoba has a solid quick ratio which allows
them to pay off their immediate short-term obligations. Recently the company has
been able to reduce its general and administrative expenses which in turn strengthened
their earning power. As of October 2011 Qdoba had 583 restaurants in operation across
the United States, having numerous restaurants across the country will allow Jack in the
Box to become stronger in the industry (Zack’s, 2012).
SWOT ANALYSIS
To get a better understanding of where Chipotle is in relation to its competitors, a SWOT
analysis was used. This analysis tells you the strengths, weaknesses, opportunities, and
threats that Chipotle has.5 The strengths that Chipotle has are their focus on food made with sustainable resources, marketing programs and their fast operational and revenue growth. Chipotle uses naturally raised beef, pork, chicken, and dairy cattle, which affects the cheese and sour cream they use. Just last year, they served more naturally raised meat than any other company in the industry. Chipotle has a few different marketing programs that have helped them to succeed. They launched “Farm Team,” which is a web-based customer loyalty program that educates people about unique company factors. In 2011, Chipotle hosted Cultivate Chicago, which drew in nearly 17,000 people to celebrate food, music, and new ideas. Additionally, Chipotle released “Back to the Start,” a short animated commercial that showed customers the difference between sustainable farming and industrial farming (Ells, 2011). It was named one of the top 10 best commercials by Business Magazine in 2011, and was named one of the top 10 ads to generate online buzz by a marketing agency (Chipotle Mexican Grill, Inc, 2012). Their weaknesses consist of irregularities in the work authorization documents of the company’s employees. Even though Chipotle has a strong view on preparing their food with integrity, that doesn’t mean that you have to be all that qualified to work at Chipotle. The services that the workers provide are not really vigorous, which means that Chipotle will look for those who will provide cheap labor. Most of the time this leads to the hiring of illegal immigrants, who will work for cheap but will also provide false documentation in order to work. Opportunities involve the company’s focus on international expansion. In addition to the new restaurants opening in the United States, the company plans to open more
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restaurants in Europe to fast-track its future growth. New restaurants are scheduled to
open in Paris and Canada in 2012.
The main threats that Chipotle faces are their intense competition with Taco Bell and
Qdoba, increasing labor costs, and fluctuations in food and supply costs. Chipotle cooks
with corn, wheat, rice, and soy oil which are all subject to fluctuations in price. All of the
ingredients prices have been slowly increasing since 2010, which has led to higher food
costs, which will ultimately lead to profit losses (Chipotle Mexican Grill, Inc, 2012). The
SWOT analysis supports our argument because their threats and weaknesses outweigh
their strengths and opportunities, especially when compared to their competitors.
COMPETITIVE FACTORS IMPACTING STOCK PERFORMANCE
According to How the Market Works, there are many factors that impact a company’s
stock performance. The most important factors include:
Current and potential earnings
News from the company and its competitors
Mergers and acquisitions
Any development and/or hype of a new product
Performance of competitors in the industry
The current and potential earnings affect the company’s stock performance because in
order to attract investors companies must show that they are profitable and will
continue to be profitable in the future. This shows investors that they will receive a
good return for their investment. The next major factor that affects a company’s stock
performance is any news related issues that the company is facing. Any legal, ethical, or7 social related issues will affect the company’s stock performance in a negative way depending on the situation they are facing. The performance of competitors in the industry is the most important factor that could impact stock performance. If competitors in the industry are more prosperous than your company it will draw investors away (How the Market Works, 2012). Right now this is the biggest factor that is hurting Chipotle’s stock performance because Taco Bell and Qdoba are showing a higher return on their investment than Chipotle is. This is one of the main reasons why we do not recommend Chipotle as a good long term investment. Business Issues in the News Chipotle has faced a variety of issues that could potentially affect their productivity in the future. The first issue they are currently dealing with is a lawsuit that was filed against them on 9/17/12 in relation to their common stock. This lawsuit affects all persons who have purchased stock in Chipotle from 2/1/12 to 7/19/12 (Standard & Poor’s, 2012). The complaint alleges that the company did not disclose their financial prospects for the future correctly, which effected decisions that were made on the market (Standard & Poor’s, 2012). In the complaint, the plaintiff states that the demand for Chipotle is slowing down due to increased competition and the current economic recession. He states that because of this, Chipotle cannot support their earnings forecast for 2012. Another issue Chipotle has faced in the last quarter took place in West Caldwell, NJ on 8/29/12. Chipotle was accused of rounding prices of food up or down to the nearest nickel. Chipotle representatives said that they did this in attempt to make lines move faster. Since this incident, Chipotle has changed their rounding policy by no longer
8 rounding up and always rounding down to favor the customer. The effects of this incident have not seemed to have an impact on business at this location (Torrisi, 2012). Both issues have potential to affect their stock in a negative way. If the lawsuit filed against them proves to be true, potential investors may be drawn away because they will feel that it is too much of a risk to invest in a company that presents false projections. Looking at stock prices during the month of September, we have seen that stock prices have dropped substantially, which could be related to the current legal issue that they are facing. This could have a huge impact on Chipotle’s market value in the future. ANALYSTS POSITION ON THE STOCK According to Standard & Poor’s qualitative risk assessment, they rated the stock as being at medium risk. Their assessment reflects their view that free cash flows is likely to grow faster than sales or profits, on the company’s growing base of restaurants in business, and on the fact that even though expansion has stayed about level, it has decreased as a percentage of the base (Standard & Poor’s, 2012). Current recommendation for stockholders is for them to hold, meaning they believe that Chipotle’s total return is expected to stay about level, with shares generally rising in price. Based on Zack’s Investment Research, they believe that Chipotle’s stock offers relative safety and steady growth and believe that the company holds a commanding position to generate improved earnings, margins, and return on capitals. Also that Chipotle has remained unaffected by the economic slowdown and continues to deliver consistently. However, with this difficult consumer spending market, fierce competition between the
9 quick-service companies, and higher input costs; Zack’s Investment Research’s current recommendation for this stock is neutral. This recommendation means that they expect that Chipotle will perform in line with the broader U.S. equity market over the next 6 to 12 months and that it is not a good time to buy shares. Both of these analyses believe that current stock price for Chipotle is overvalued. According to Standard & Poor’s fair value rank, stocks are ranked from most overvalued (1) and most undervalued (5) and based off Chipotle’s September 22, 2012 stock price of $336.40, they ranked Chipotle at 1 for being overvalued. Standard & Poor’s fair value calculation values Chipotle’s stock price at $278.20 per share, which suggests that CMG is overvalued by $58.20 or 17.3% (Standard & Poor’s, 2012). Should the Stock be Acquired? Based on our research, we have come to the conclusion that the stock should not be acquired. Since Chipotle has a large-cap growth investment style, they offer growth stock, and therefore do not provide dividends. The main difference between short and long term investments is the amount of time it takes to benefit from your investment. Long term investments have a lower risk than short term investments because they have a greater degree of stability over time (Mussi, 2012). Since the company does not provide any dividends, we do not see any potential gain from purchasing stock. CONCLUSION After analyzing Chipotle’s financial background and comparing it with its competitors Qdoba and Taco Bell, we do not recommend investing in Chipotle. Several factors contributed to this decision, such as their profits and earnings, stock prices, and recent
10 reports in the news. Taco Bell’s profits and earnings have been rapidly increasing over the past 10 years, and have a higher rate of return than Chipotle does. Since all of the costs of ingredients and supplies are going up, it is causing Chipotle’s operating expenses to increase, leading to profit losses. In addition, all of the legal issues that Chipotle is currently facing cause the stock price to go down, and make investors uneasy about investing in the company. Increased competition over the past few years can potentially lead to a negative impact on Chipotle as well. We would recommend Chipotle’s biggest competitor, Taco Bell as an alternate investment within the Fast Casual Restaurant Industry. YUM Brands is in the middle of a multi-year program that will reduce its ownerships of KFC, Pizza Hut, and Taco Bell in the United States. This will allow the company to have a more significant stream of franchise revenue by reducing its general and administrative expenses. YUM Brands foresees at least as much profit as in previous years with no capital expenditures. The company is established in the growth markets of North America and Europe which provides a mainstream of revenue. YUM is also expanding into emerging economies that provide a huge potential market, over half the company’s operating profits come from China and 72 other emerging countries. Over the past two years Taco Bell has entered five new countries. With all these locations globally, YUM Brands has put itself in a great position to potentially dominate the industry of fast casual food. There is a lot to like about YUM Brands especially with all the potential growth it has in its stock in the foreseeable future (YUM Brands, 2012).
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WORKS CITED
Chipotle Mexican Grill Analyst Report. (2012, September 21). Retrieved from
Standard & Poor's NetAdvantage database.
This source allowed me to see the strengths and weaknesses of Chipotle’s Stock
based on the opinions of Standard & Poor’s analysts. It allowed my group to come to the
decision that Chipotle’s stock is not a good long term investment because its stock price
is overvalued and because of current legal issues that their company is facing.
Chipotle Mexican Grill, Inc. SWOT Analysis. (2012). Chipotle Mexican Grill, Inc. SWOT
Analysis, 1-8.
This source provided me with all of the information about the SWOT analysis that I
needed. I trust the source because it comes from an academic database. It gave in-
depth information about all of the strengths, weaknesses opportunities, and threats
that Chipotle has. I learned that Chipotle uses more naturally raised meat than any
other restaurant company. I also learned that they have one of the top 10 marketing
programs in the industry because they use low cost strategies and word-of-mouth
techniques. This source helped us come to the conclusion that Chipotle is not a good
long term investment because of its weaknesses and its fierce competition. Too many of
the competitors have lower costs and more geographic advantage than Chipotle.
DATAMONITOR: Yum! Brands, Inc. (2010, September 2). Retrieved from Business Source
Complete
database. (Accession No. 54576968)
Ells, S. (2011). Back to the Start. Retrieved November 28, 2012, from The
Chipotle Cultivate Foundation website: http://cultivatefoundation.org
Food With Integrity. (n.d.). Retrieved October 15, 2012, from Chipotle Mexican Grill
website: http://www.chipotle.com/en-US/fwi/fwi.aspx
Moran, M. (2011, December 31). 2011 Annual Report. Retrieved from
http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-analysts
This citation provided me with information regarding Chipotle’s future
outlook and growth on the market. It provided me with key statistics such as restaurant
development, revenue increase over the past few years, and expected growth
projections for the future.
Mussi, J. (n.d.). Comparing Short Term and Long Term Investments. Retrieved from Final
Sense website:
http://www.finalsense.com/learning/investment/comparing_short_term.htm
Olsen, E. (2012, February 9). An Animated Ad With a Plot Line and a Moral. Retrieved
from http://www.nytimes.com/2012/02/10/business/media/chipotle-ad-12
promotessustainablefarming.html?n=Top%2fNews%2fBusiness%2fCompanies%2fChipot
le%20Mexica n%20Grill%20Inc.
I used this source to gather information on the impact of Chipotle's newest
marketing ad.
S&P Analyst Research Notes and Other Company News. (2012, September 22).
Standard& Poor's NetAdvantage. Retrieved from Standard & Poor's NetAdvantage
database.
I used this source to find information regarding Chipotle’s most recent legal
issue that they are facing.
Stodell, H. (2012, September 22). Heinz Responds to Demand for Hotter Sauces with
Chilli Variants. Retrieved from
http://www.lexisnexis.com.proxytu.researchport.umd.edu/hottopics/lnacademic/?
Torrisi, L. (2012, August 29). Chipotle Stops Keeping Customers’ Change. Retrieved from
http://abcnews.go.com/blogs/lifestyle/2012/08/chipotle-stops-keeping-customers-
change/
I used this source to gather information regarding Chipotle's most recent
ethical issue that they are facing.
What Affects Stock Price? (n.d.). Retrieved September 30, 2012, from How the Market
Works website:
http://www.howthemarketworks.com/popular-topics/stock-price-factors.php
This website explained what factors impact a company's stock performance. I
realized after looking at this website that I really didn’t know much about the causes of
change in stock prices. I learned that anything from hype of a new product, to the
company’s financials can impact the stock performance. People can either sell their
stock too quickly if they hear one negative thing about the company, or they miss a
prime opportunity to purchase
stock because they are hoping they will be able to find even more benefit later on. It
was interesting to see that when Chipotle was in the news for rounding off their
prices, stock performance took a dip because people were not happy about it.
Yahoo. (2012, September 30). Yahoo! Finance. Retrieved from http://finance.yahoo.com
YUM Brands. (2012, June 25). YUM! Brands, Inc. SWOT Analysis. Retrieved from
http://web.ebscohost.com.proxy-tu.researchport.umd.edu/
I used this publication to get a better understanding of what Chipotle's
competitors strengths and weaknesses were. Through this data I was able to provide
financial information that helped our group come to a unanimous conclusion of
whether to recommend Chipotle to investors.
Zacks Investment Research. (2012, September 21). Retrieved from LexisNexis Company
Dossier database.13
Zacks Investment Research (2012, September 30). YCharts Chipotle Mexican Grill
Financials. Retrieved from http://ycharts.com/companies/CMG/eps
This website was used in order to find financial data on not only
Chipotle, but also information on its competitors. This website was used in helping us
determine which company is more successful financially.
Zacks Investment Research. (2012, September 21). Retrieved from LexisNexis
Company Dossier database.
This source allowed me to see reasons whether to buy or sell Chipotle
Mexican Grills’ Stock based on the opinion of Zacks Investment Research analysts. It
showed me that Chipotle’s Stock is not a good investment and their current
recommendation for the stock is to hold.You can also read
