Stock of the Week: Shake Shack (SHAK)

Jun 21, 2015 -

The Scoop on Shake Shack 

What started as a hot dog stand in New York City's Madison Square Park has quickly turned into a publicly traded company. The original hot dog cart was established in 2001 to help rejuvenate Madison Square Park. The stand was an immediate hit and peopled formed lines daily for three years. Since then, Shake Shack ("the Company") has opened up numerous restaurants and expanded throughout the world.


Shake Shack is a modern day "roadside" burger stand. The Company serves premium burgers, frozen custard hot dogs, crinkle-cut fries, shakes, beer and wine. Per the SEC filings, as of April 1, 2015, there were 66 Shacks in operation, system-wide, of which 34 were domestic company-operated Shacks, five were domestic licensed Shacks and 27 were international licensed Shacks.

Highlight Fundamentals

Financial Highlights for the First Quarter 2015 (per SHAK's press release):

▪ Total revenue increased 56.3% to $37.8 million.
▪ Shack sales increased 59.2% to $36.0 million.
▪ Same-Shack sales increased 11.7%.
▪ Net loss was $(12.7) million, or $(1.06) per diluted share, which included $13.2 million of after-tax expenses incurred in connection with our IPO.

Unlike most other recently IPOed publicly traded restaurants, Shake Shack is profitable and has been for the past three years. Shake Shack recorded profits of $4.1M, $5.4M, and $2.1M for the fiscal year ended 2012, 2013, and 2014 respectively. Most recently in the first quarter of 2015, the Company recorded a loss of $12.7M compared to a profit of $1.1M in the prior comparable period. A closer look at the Q1 2015 10Q reveals that $12.8M of the loss is attributable to a one-time IPO related stock-based compensation expense and $0.6M IPO expense. Adjusted for the aforementioned, Shake Shack would have recorded a $0.7M profit in Q1 2015.  

The adjusted pro forma fully exchanged weighted-average shares of Class A common stock outstanding-diluted shares count as of April 1st, 2015 was 37,049,000. As of 6/19/2015, the price was 69.34 per share, which brings the market capitalization to approximately $2.6B. You don't need to be a math genius to know that currently Shake Shack is trading a very high P/E ratio. Without a doubt, this valuation is predicated on the potential of future earnings. Wendy's Co has an approximate market capitalization of $4.1B as of 6/19/2015, which is about twice that of Shake Shack. However, it did end fiscal year 2015 with net income of $121M. For Shake Shack to be on the same market capitalization to net income ratio, it would have to have a net income of $77M. 

What makes the Company different from say a Habit Burger? It boils down to company culture, branding, supply chain, and their food of course. The restaurant industry is quite simple to understand. The more food you sell, the more revenue you generate. At the same time, you'll want to keep down operating costs. The way to sell more food is to appeal to your target market. The innovation comes from the food itself and branding. Of course, location does matter. But, we've seen people drive great lengths to eat at In-N-Out burger when one was not available outside of California. Restaurants constantly ask themselves how can you generate more same store sales and where should they open up more stores. 

Highlight Technicals

From a technical perspective, SHAK has done incredible considered how highly valued it was coming out of the IPO.

SHAK IPOed at $21 earlier this year. However, by the end of the first day of trading, SHAK reached $45.90.  Over the next few days, it pulled back a little bit towards $37.84, however has since skyrocketed to a high of approximately $97.31. We've overlaid the below chart with the Fibonacci retracement taking the low and the high since it IPOed.


The ideal entry would be at the 61.8% retracement level of $60.58. Though if you look closely you can see that the stochastics suggests that the stock is currently oversold. A bounce is definitely due and would not be unexpected. It is also trading below the 50 DMA. Any close above such level and a close above the high and low bar of the previous day, would suggest a possible entry point. 

Disclaimer: This article is written for informational purposes only and not intended for investment advice. For more similar articles visit www.stockkevin.com.
Disclosure: I do not have a position in SHAK.
 
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