Wedbush Upgrades Shake Shack Shares, Sees 16% Upside From Here

Shake Shack Inc SHAK is an industry-leading restaurant chain that boasts an underapreciated path to growth, at least according to analysts at Wedbush who turned bullish on the stock after its first-quarter earnings report.

Wedbush's Nick Setyan upgraded Shake Shack's stock rating from Neutral to Outperform with a price target boosted from $33 to $43 given its industry leading EBITDA growth profile in 2018 and beyond.

EBITDA Outlook

According to Setyan, Shake Shack's EBITDA is expected to grow by 29 percent in 2018, which is notably higher than the group average of just 17 percent. Beyond 2018 the analyst expects the restaurant chain to sustain a 20 percent EBITDA growth rate.

Setyan also believes Shake Shack's EBITDA isn't at risk from rising beef prices. Specifically, the company is in a strong position to raise its menu prices to counter commodity prices and consumers could favorably respond given the low pricing relative to historical levels. Also, rising beef prices could "curtail intense discounting" within the quick service restaurant (QSR) burger chains, which benefit Shake Shack's competitive positioning.

Achievable Guidance

Setyan's upgrade is also partially based on expectations for Shake Shack to achieve the company's reset comp guidance. Management lowered its 2017 same-store sales growth guidance to be around flat from a prior range of 2 to 3 percent post-Q1.

This does imply a "modest" 1 percent average growth for the final three quarters of 2017, a guide that is achievable given: 1) higher transactions from the mobile app, 2) menu innovation and 3) average check growth.

Bottom line, the analyst is confident that Shake Shack will deliver upside to current EBITDA estimates, which makes the stock's valuation attractive at current levels.