Chipotle's over $400! That was my first thought yesterday when I was looking for stocks that have doubled in the last two years. Chipotle has grown from low $120's back in mid 2010, to a high of $443 in April 13, 2012.
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Considering the fact that CMG is a burrito fast food chain, its growth is very surprising. With a P/E ratio of over 50 it is one of the highest, if not the highest in its peer class.
Company 
P/E 
Chipotle (NYSE:CMG) 
57.2 
Domino's Pizza (NYSE:DPZ) 
20.3 
Panera (NASDAQ:PNRA) 
16.3 
Brinker Intl (NYSE:EAT) 
17.4 
Cheesecake Factory (NASDAQ:CAKE) 
18.3 
Using only P/E ratio, we can think that the stock is overvalued, but I prefer to use one more valuation technique before arriving at that conclusion. I decided to do a Free Cash Flow analysis on CMG to see if it's Free Cash Flow confirms its stock price. It's a very simple analysis that is often used to see if a stock is correctly valued or not.
Step 1: Compute growth rate (G)
For this we are going to use a twostage growth. A 5 year short term growth rate and then we assume the company will decline to a long term 5% growth rate.
Because CMG doesn't have a dividend, I'm going to use it's average ROE as a proxy for the next 5 years growth.
2009 
2010 
2011 

ROE 
18.03% 
22.07% 
20.58% 
Average = 20%
Step 2: Computer Required Rate of Return ((NYSE:R)
For this I'll use the popular Capital Asset Pricing Model (CAPM).
R = Risk free rate + Beta*Market Risk Premium.
Risk free rate = 3.5% (a bit higher than the 10 year Treasury Notes rate)
Beta = 1.02
Market Risk Premium = 6.2% (obtained from Aswath Damodaran's website)
R = .035 + 1.02*.062 = 9.82%
Step 3: Calculate Free Cash Flows
We'll be calculating now the Free Cash Flow to the Firm for the year 2011. After that we multiply it by the growth rates to get the next 5 years cash flows and the terminal value.
CFO 
$411,096 
 Fixed Capital Investment 
151,147 
+ Interest after tax 
2,120 
FCFF 
$ 262,070 
Cash Flows
2012 
2013 
2014 
2015 
2016 
2017 

FCFF ($) 
314,483 
377,380 
452,856 
543,427 
652,113 
684,718 
PV of FCFF ($) 
286,352 
312,885 
341,876 
373,553 
408,165 
14,193,992* 
*This value is called the terminal value, the value assuming the company will grow at the same rate forever. It is calculated as : 684,718 / r  g, were r = 9.82% and g = 5%.
Step 4: Value of equity
When we add all the Present Value of FCFF we get the value of the firm = $15,916,823.
We subtract the 2011 liabilities to get the value of the equity.
Value of firm: $15,916,823
 liabilities: $1,044,226
= Value of equity: $14,872,597
Step 5: Value of shares
Chipotle has around 31.7 millions shares outstanding. We divide the value of equity by the number of shares and we get the value of each share.
= $14,872,597 / $31,700,000 = $ 469.17 x share
Conclusion
The free cash flow valuation is a great tool for valuating companies. Cash flow is harder to manipulate than earnings, and for this reason I prefer to use this analysis instead of other comparative techniques that use earnings and other values.
We can conclude based on Free Cash Flow that Chipotle is undervalued. Using today's price (4/25) of $410, Chipotle is 14.40% undervalued.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.