The Street Agrees: Shake Shack Delivered Tasty Q2, But Valuation Is Full

Shake Shack Inc SHAK delivered second-quarter results that came in notably above expectations but few analysts find the valuation attractive at current levels.

The Analysts

Barclays' Jeffrey Bernstein maintains a Neutral rating on Shake Shack with a $70 price target.

Morgan Stanley's John Glass maintains at Equal-weight, price target lifted from $61 to $65.

Wedbush's Nick Setyan maintains at Neutral, price target lifted from $70 to $75.

Shares of Shake Shack gained more than 15%, trading around $84.86 at time of publication.

Barclays: Tasty But Expensive Burger

Shake Shack's quarter came in better than expected "top to bottom" as the company benefited from lower G&A and tax, Bernstein wrote in a note. Some of the notable takeaways include a 19% year-over-year growth in EBITDA at $25.9 million and comp growth of 3.6% beat expectations of 2.2%.

Bernstein said management's growth strategy appears to be based on investing today to build out an infrastructure tomorrow. This is evident in the company lifting its 2019 revenue growth guidance from 25-27% to 27-28% but earnings guidance "remains elusive."

The analyst said it's difficult to recommend buying Shake Shack's "tasty" looking stock at an "expensive" valuation. Specifically, shares are already trading at 27 times 2020 estimated EBITDA, which represents a 45% premium to high-growth restaurant peers.

Related Link: Shake Shack's 'Beefy' Quarter Not Enough For These Analysts To Turn Bullish

Morgan Stanley: Beyond The Headline Numbers

Shake Shack's management guided to 38-40 new company openings and 18-20 licensed openings, which Glass said marks a faster pace compared to prior guidance. More important for the investment thesis than store openings is the company's ability to show solid performance on new developments.

The company will enter the delivery space with GrubHub GRUB over the next few quarters and this should prove to be an "important sales driver." However, any margin benefits are unlikely to be seen until 2020 and beyond and is likely to create "some bumps" in comp store sales performance over the near-term.

Management's 23% annual restaurant margin goal looks to be "achievable," Glass said. For 2020, several key events to support margins include no significant uptick in food costs and less labor pressure versus 2018 and 2019.

Wedbush: Conservative Guidance

Management's outlook of 2% same-store sales growth in 2019 and revenue of $585 million-$590 million looks to be conservative, Setyan wrote in a note. The company should show 2.3% same-store sales growth in 2019 from the launch of delivery and new product innovation.

Setyan said Shake Shack's revised store opening outlook eases some new-term unit growth concerns. But the company's valuation is based on a discounted valuation of its ultimate opportunity, including 450 total units, $3.5 million terminal average unit volume, 20% UL margins and discounted back six years. This translates to a price target of $75 per share.

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