5 Reasons I Just Bought Shake Shack Inc Stock

The basics

• Shake Shack has been perhaps the most closely watched IPO this year, and shares have been volatile.

One wild ride

Valuation is high

• After reaching a high around $95 in May, the stock has lost 50% as it’s been panned by a chorus of analysts and commentators.

• Bears insist that the valuation is outrageous and the stock’s early gains were a result of “brand euphoria.”

• However, there a several catalysts in the company’s favor.

Average unit volumes are huge

• One of the best like-for-like ways to compare restaurant stocks is on average unit sales. Using this metric, we see that Shake Shack is miles ahead of its competitors, showing how popular the better burger chain is.

There’s no comparsion

Average unit volumes are huge

And getting better...

• That means average unit volume should grow this year, even though management has projected a decline over the long term as it expands outside of its core Manhattan market.

In its most recent quarter, average weekly sales rose from $95,000 to $102,000.

Outstanding Leadership

• Meyer’s Union Square Hospitality Group’s restaurants have won 26 James Beard awards, and Union Square Cafe has been named “Most Popular” restaurant by Zagat 9 times.

• In other words, Shake Shack’s success is not an accident. It’s the product of visionary leadership and excellent execution.

Founder Danny Meyer is one of the most respected leaders in the restaurant industry.

The real estate advantage

Shake Shack targets only prime real estate, reinforcing sales and brand strength, and its brand equity helps it get locations that rivals might not.

The Citi Field Shake Shack has been overwhelmingly popular. Source: Shake Shack

International opportunities

• Average unit volume at international stores was $6 million last year, better than at domestic company-owned locations.

Similar to its real estate advantage, the company’s brand makes it a desirable business in far-flung locations like Moscow and Dubai.

International opportunities

All international restaurants are licensed. On average, they have contributed about $250,000 in revenue annually, much of which flows through to the bottom line.

A Shake Shack in Dubai. The company already has six locations in the Middle Eastern hub, and expects to open many more abroad. Source: Shake Shack

Analysts are underestimating growth

• EPS of $0.09 vs. expectations of $0.03, and revenue jumped 75%.

• In spite of that strong performance, analysts only expect EPS of $0.30 next year.

• Restaurant-level profitability has improved 400 basis point this year, which should lead to an acceleration in EPS growth.

Shake Shack crushed estimates in its previous quarter

Add it all up

• That would give it a relatively modest P/E of about 60 at today’s price.

• Considering the growth opportunities, brand strength and unit economics, that seems like a relative bargain.

Next year, the company could generate net income of around $25 million

The Next Billion-Dollar iSecret