Equity Research Presentation
Transcript: Equity Research Project Team 10 Ebube, Endalow & Masih Report Overview Industry Analysis Company Analysis Capital Structure WACC Main Investments Valuation Conclusion We will discuss Agenda Overview Report includes Fundamental analysis of 3 US restaurant chains: Cheesecake Factory (CAKE), Chipotle Mexican Grill (CMG) and Dunkin Brands (DNKN) Intrinsic value determined using DCF valuation Cheesecake- $1.94 billion Chipotle- $24.2 billion Dunkin Brands- $8. 7 billion Based on our results, our recommendation for the company's stocks are: Cheesecake - Hold Chipotle - Buy Dunkin Brands - Buy US Resturant Industry Facts Industry Analysis US restaurant industry has multiple segments (fast-food, casual dinning, chain restaurants) Market capitalization for restaurant industry is $351.66 billion (Bloomberg) Restaurant industry represents 1.8% of US GDP Companies within industry do not partcipate in international trade Key economic drivers include household income, healthy eating index and consumer spending. Industry is expected to grow despite saturated state Comparable Company Analysis Capital Structure & WACC Cheesecake Factory Founded in 1978 in Beverly Hills, California. Restaurant menu offers a wide variety of options prepared from scratch in large portions. Company has 210 full-service restaurants both in the U.S and internationally (Canada, Mexico, Saudi Arabia etc.) Payout Policy The company has 2 payout methods ; share repurchases and dividends Conducts dividend payments every quarter and share repurchases annually Major Investment Decisions Mostly involves choosing restaurant locations/sites to invest in Cheesecake uses EBITDAR/(cash investment+capitalized rent (8*annual rent) to measure its ROI on site locations Company Overview • Assumed 5.3% revenue growth for years 1-5, then 6.00% for years 6-8, and then 5.5% for years 9-10 due to industry saturation . • Estimate 5.55% cost growth for years 1-8 and 5.00% for years 9-10 • For CAPEX and NWC, projections based on revenue & cost growth. NWC: -0.2% growth (years 1-5) , 0.2% (years 6-7) and 0.3% (years 8-10) CAPEX: 5.79% growth (years 1-10) • For the tax rate, projected 27% based on effective tax rate. Ignored tax credit in 2017 which may have been brought on by the tax-cut bill • Estimated terminal year revenue rate of 2.00% and 1.9% for costs at maturity state • Depreciation estimated as a % of CAPEX at 70.5% Model Assumptions DCF valuation used to determine firm's intrinsic value. Assumed excess cash policy when calculating net debt. Company has 46 million outstanding shares. Model values Cheesecake at $42.64 which is below its current share price of $47.63 (04/13/19) (overvalued) CAKE stock recommendation-HOLD Valuation Chipotle Founded in July 13, 1993, Denver, Colorado Serves an intensive menu of burritos, tacos, burrito bowls and salads, using fresh ingredients As of December 31, 2017, CMG operated 2,363 Chipotle restaurants throughout the United States, as well as 37 international Chipotle restaurants, and also had eight non-Chipotle restaurants. Payout Policy Chipotle has not declared or paid any cash dividends on its common stock. Chipotle’s payout policy consists mostly of share repurchases. The company has no debt so their capital structure is all equity financed. Major Investment Decisions Mostly involves choosing restaurant locations/sites to invest in Uses analysis and analytical modeling techniques that involve proprietary formulas, CMG projects sales and return on investment for each potential restaurant site. Over the past five years, Chipotle has also invested in innovations like Pizzeria Locale, Tasty Made, and ShopHouse Southeast Asia Kitchen restaurants. Company Overview Assumed revenue growth of 9.93% for years 1-10. Assumed 10% cost growth for years 1-3, then 8 % for years 4-8, and then 7% for years 9-10 due to industry capacity. For CAPEX and NWC, projections based on revenue NWC: 1% growth (years 1-10) CAPEX: 3% growth (years 1-10) For the tax rate, projected 26% based on effective tax rate of 2018. The recent tax bill was taken in account. Estimated terminal year revenue rate of 2.00%. Depreciation estimated as of revenue at 3.27% Model Assumptions DCF valuation used to determine firm's intrinsic value. Assumed excess cash policy when calculating net debt. Company has 28 million outstanding shares. Model values Chipotle at $801.67 which is above its current share price of $712.44 (04/13/19) (undervalued) CMG stock recommendation-BUY! Valuation Dunkin Brands Founded in 1950 in Quincy Massachusetts One of the world leading franchisors of quick service restaurants. Operates over than 60 countries in the world. 20,900 restaurants Payout Policy Pays cash dividend on quarterly basis The amount will be determined on the company performance. Major investment Decisions Company invested a lot in technology DNKN had equity method investment Purchase of single tenants in Los Angeles for $2.6 million Company Overview Revenue growth- average of the