Here’s Why The New Proposed Corporate Tax Regime Can Impact Chipotle Mexican Grill Significantly

by Trefis Team
-9.35%
Downside
314
Market
285
Trefis
CMG
Chipotle
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One of the key economic reforms proposed by the Trump administration is to bring down the corporate tax rate to 20 percent, from the current 35 percent levels. The White House economic advisor recently stated that this proposal is “non-negotiable” and is aimed towards stimulating economic growth in the country.  For companies such as Chipotle Mexican Grill, for whom the current effective tax rate is around 39%, this move can make a significant impact. While the Republicans are likely to introduce a bill to reduce the corporate tax rate soon, reports suggest that the proposal might suggest a 3 percentage point reduction in the tax rate each year to bring it to 20% by 2022. This phased reduction could help reduce the annual federal deficit due to this change, and increase the likelihood of this reform going through.

For Chipotle Mexican Grill (NYSE: CMG), which is struggling to re-establish itself after the E. coli virus, a reduced income tax rate implies a significant increase in post-tax income and EPS (earnings per share), leading to a significant change in its valuation.

Our current model assumes that Chipotle’s effective tax rate will be around 36% over our forecast period. However, if this tax rate reduces gradually based on the proposed reforms and reaches 20% by the end of our forecast period (2024), there can be a more than 25% upside to our price estimate.

Click here to see the impact of effective tax rate on Chipotle’s valuation.

Our current price estimate for Chipotle Mexican Grill is $284, which is very close to its current market price. In a scenario where the effective tax rate for the company is significantly lower, our price estimate can change to $357 – a 25% upside.

Further, lower taxes would also imply higher cash flows for Chipotle and the company can use these increased cash flows for growth, once it is able to streamline operations of existing restaurants. A faster growth rate can lead to an improved valuation for the company. We currently expect Chipotle to grow its restaurants steadily over our forecast period and reach around 3,700 restaurants by 2024. However, a faster pace of growth with more cash flows available for capex, can lead to an upside in our price estimate.

Click here to see the impact of growth in number of restaurants on Chipotle’s valuation.

While several companies would benefit from Pres. Trump’s new corporate tax regime, for Chipotle this could prove the turning point needed by the company to re-establish itself in the fast casual restaurants segment.

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