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Leigh Drogen, Estimize (585 clicks)
Hedge fund trader, long/short equity
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In the very early stages of my thinking around what Estimize should provide the community, it was apparent to me that there wasn’t a tool out there which allowed intermediate to longer term fundamental investors to express their analysis of the data as it pertained to the stock price. I thought hard about how I would want to express the process that takes place in my head regarding how I get from EPS and Revenue to price.

Not everyone looks at the market the way I do, that’s for sure. And there are 1,000,000 ways to skin a cat, no one trading or investing philosophy is the holy grail. I do believe some are better and worse, some are easier and harder to execute, and each are meant for different types of people. But, I do believe that given my experience, what I’m about to walk you through is the way in which most intermediate to longer term fundamental investors, especially of the growth variety, do their analysis. We are building Estimize as a way to express this process, and you will see in the near future several different features which allow you to better analyse a company in this way, and share that analysis with the community.

The image above is my FQ3 2012 Revenue estimate for CMG, along with my estimates for previous quarters.

How did I come up with these numbers? It’s really not rocket science, and it doesn’t need to be. I believe that Chipotle is going to continue to grow revenue at 24% yoy for the next four quarters. I’ve taken a look at their growth over the past two years, their business, their market, and other factors. Do I have any great insight into how they are going to perform, no, why would I. This is a growth estimate, plain and simple, it is a guideline for the next piece of the puzzle.

Given 24% yoy revenue growth, I’m giving CMG an estimate of 20% EPS growth over the next 4 quarters. A major factor in that assumption is that I don’t believe their margins are going to collapse, I think we would have already seen this happen last quarter if it was going to take place.

If CMG EPS comes in at $8.03 for ttm earnings in FQ3 2012, and the market continues to give it a 50 multiple (52 right now), we get a price of $401.50.On the revenue side, CMG is trading at a P/S ratio of 4.93, the highest it’s ever been. Let’s take that number down to 4.5 and you’re at a price of 380. Given that CMG trades at around $340 right now, and even if we take the higher price of around $400, that’s only a 20% move from here. CMG is only a 10B company and MCD is still getting a P/S of around 4 at 10x the size. I can see CMG beating even these agressive revenue estimates and pushing past $400 a year from now, I don’t see major multiple contraction coming and the chart still looks very healthy.

This is how I think as a trader who looks to buy high growth mid cap companies. Yes, I use a lot of technical analysis, but the process of understanding what goes into the price from a fundamental perspective needs to always be considered. If for no other reason, you need to understand all of the variables behind the price, in order to exit your position if one of them begins to degrade. If CMG continues to meet my expected earnings and revenue targets, but the P/E multiple begins to collapse, it could signal that the market believes margins are going to be an issue. And at that point, it doesn’t matter whether or not I believe or don’t believe they will be, what matters is the market is voting and I want out.

As we add different data points which you are able to make estimates on, including margins and those earnings and revenue multiples, we come to a very interesting place where community members are producing price estimates as I’ve just done. This is not a target price as you might find many wall street analysts spitting out. This is a straight calculation of what you feel the stock should trade at if certain parameters are met. Over the course of the next four quarters I will undoubtedly alter the numbers that go into this equation, which will alter the resulting price. In a sense, the Estimize tool will allow you to disaggregate the price into different fundamental metrics, make estimate on them, and reassemble them back into a price.

We’re excited for what this means from a social finance perspective, and can’t wait to see all of the analysis produced around the numbers.

Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see the Disclaimer page for a full disclaimer.

Source: Why Chipotle Is Going To $400