Baird's Positive Long-Term View On Shake Shack Tempered By Near-Term Concerns

Shake Shack Inc SHAK is among the few companies in the space that can deliver "well above-average" revenue and earnings growth over the longer term, but this doesn't mean investors should be buyers of the stock right now, according to Baird.

The Analyst

Baird analyst David Tarantino initiated coverage of Shake Shack's stock with a Neutral rating and $66 price target.

The Thesis

Tarantino said Shake Shack's core business of premium and cooked-to-order American food at an accessible price point is an "appealing" concept for investors.

The company is well positioned to deliver a mid-to-high teens annual revenue growth over the coming five years along with an average EBITDA growth near 20% per year. The growth will come from an expansion of stores from around 150 today to more than 450 stores in the U.S. with further upside internationally.

The near-term picture isn't as appealing to investors, however, especially after management's 2019 guidance implies comps in the fourth quarter could come in at negative 2.5%. Exiting 2019, Shake Shack will face difficult comparisons in the first half of 2020. As such, the risk-reward profile right now is balanced with the stock trading at a next 12 months EV/EBITDA multiple of 27.5 times.

The price target is consistent with a 20-year discounted cash flow model that factors in "realistic assumptions" about the company's growth outlook.