Shake Shack Back In Flavor? Morgan Stanley Upgrades

Shares of Shake Shack Inc SHAK soared in the weeks following its 2015 IPO, but the stock has since lost all momentum and continues to trade below $45.90, which marks the closing price on its first day of trading.

The Analyst

Morgan Stanley's John Glass upgraded Shake Shack's stock from Underweight to Equal-weight with a price target boosted from $34 to $41.

The Thesis

Glass' upgrade of the burger chain is based on three factors.

1. The company's unit growth has consistently come in ahead of expectations in each of the past three years with no reason to think 2018 would be any different. In fact, company units are growing at 40 percent which represents the fastest growth rate among any restaurant and each new unit adds up to $750,000 in EBITDA.
2. Management's improved disclosure on average unit volumes (AUVs) and margins by region should improve investor sentiment and confidence in understanding the longer-term outlook.
3. The analyst's revised valuation model based on updated unit growth and improved margin profile implies a value of $41 under the current tax code but a tax reform program could add another $9 per share of value.

Bottom line, Shake Shack is among the very few if only emerging growth company under Glass' coverage to consistently meet or beat top line results, the analyst said. As such, with fewer than 100 units in the U.S., there is "ample room" for the company to more than triple its store base.

Price Action

Shares of Shake Shack are higher by more than 16 percent since the start of 2017.

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