Analysts Debate: Is It Too Late To Buy Shake Shack?

Shake Shack Inc SHAK reported its biggest earnings beat in recent memory Thursday, sending shares higher. Naturally, investors are now asking if it's time to sell the stock or buy more.

The Analysts

William Blair's Sharon Zackfia maintains an Outperform rating on Shake Shack's stock with no assigned price target.

Jefferies' Andy Barish maintains an Underperform rating on Shake Shack's stock with a price target lifted from $33 to $39.

The Bull Case

Shake Shack's earnings report represents the company's biggest earnings beat in three years and was further highlighted by a 1.7-percent growth in comps when the Street was expecting flattish growth, Zackfia said in a research report. Traffic did fall 4.2 percent from one year ago due to poor weather and a free burger promotion, but at the same time, restaurant-level margins of 25 percent exceeded the 22.9 percent the analyst expected.

Encouragingly, Shake Shack's management also reiterated its 2020 outlook, Zackfia said. The restaurant chain is aiming to operate 200 domestic company-owned restaurants and 120 global licensed units at the end of the decade, which would generate an estimated $700 million in revenue.

Over the longer term, the case for 450 company-owned restaurants in the U.S. is reasonable, the analyst said. This would translate to $1.5 billion in revenue and more than $350 million in EBITDA globally versus the $453 million and $61 million, respectively, expected for 2018, she said. 

Shake Shack's growth profile is "one of the strongest and longest" among all emerging brands in the publicly traded restaurant space, Zackfia said. 

The Bear Case

Shake Shack's earnings report was notable for 1.7-percent same-stores sales growth and "limited" labor pressures, Jefferies' Barish said in a research report. Restaurant-level margins came in "better for now," but labor could prove to be a "major pressure" throughout the rest of 2018, as new development plans are weighted toward the back half of 2018, the analyst said. G&A expenses are likely to rise in the back half of 2018 from new office costs and headcount ramp — and more notably from expenses tied to "Project Concrete," a new operational and financial systems upgrade initiative, Barish said. 

It's unclear if digital and delivery initiatives that helped Shake Shack in the first quarter will be sustainable over time, the analyst said.

While Steak Shack's Q1 report may show the company's brand is "more powerful than we are currently assuming," a bearish stance is justified due to expectations for more challenging cost pressures ahead, Barish said. 

Price Action

Shake Shack stock was up 23.35 percent at $58.48 at the time of publication Friday. 

Related Links:

Shake Shack Back In Flavor? Morgan Stanley Upgrades

Analyst Says Long-Term Investors In Shake Shack Should Continue Buying Shares

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