Stifel: Shake Shack Is One Of The Fastest-Growing Restaurant Chains — And That's Priced In

Restaurant chain Shake Shack Inc. SHAK is among the fastest-growing publicly traded restaurants, but that isn't reason enough to buy the stock, according to Stifel. 

The Analyst

Stifel's Chris O'Cull initiated coverage of Shake Shack with a Hold rating and $65 price target.

The Thesis

Shake Shack boasts impressive brand awareness coupled with a compelling menu and digital innovation, O'Cull said in the initiation note. (See his track record here.) 

Each restaurant is estimated to serve on average of more than 7,000 guests per week, or 6,085 excluding several high traffic New York City locations, which is "materially higher" than its publicly traded restaurant peers, the analyst said.

Privately owned Five Guys locations serve 1,525 customers a week, and fast casual rival Chipotle Mexican Grill, Inc. CMG serves an average of 3,445 guests per week, according to Stifel. 

Shake Shack's superior unit economics imply that new restaurant openings can quickly contribute to the company's overall earnings, O'Cull said. Management expects to expand its domestic footprint from 100 units today to 450 restaurants over time, he said. Outside of the U.S., the company's pipeline of new store openings could double its current count to more than 120 global licensed units by 2020, the analyst said. 

Shake Shack shares gained more than 40 percent in 2018 alone and are trading at 30 times NTM EV/EBITDA, O'Cull said.

The valuation implies a premium to limited service peers at 15 times and reflects much of its future growth prospects, he said. 

Investors may want to consider sitting on the sideline, but becoming more constructive if the stock dips to the mid-$50 range, the analyst said. 

Price Action

Shake Shack shares were trading down 2.43 percent at $60.25 at the time of publication Wednesday. 

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Photo by Dustin Blitchok.