Can You Invest In Shake Shack?

On the west coast, In’n’Out is all the rage while on the east coast Shake Shack holds the mantle as the best burger joint among large fast food joints.

The tasty burgers have left many satisfied customers wondering can you invest in Shake Shack? Yes, you can buy shares of Shake Shack by placing a market or limit order at your brokerage firm using the ticker symbol SHAK.

The real question, though, is should you buy shares of this east coast burger leader?

New York-based fast-food chain Shake Shack Inc. (NYSE:SHAK) is already having a stellar year with its share price up 36%, so will the momentum continue?

1 Billion Reasons to Own Shake Shack

Shake Shack’s origin lies, remarkably, in a humble hot dog stand in New York City’s Madison Square Garden. Since those beginnings, the company has expanded to become a global business of significant size.

Sales have grown dramatically over the past 5 years. Between fiscal 2019 and 2020, the company’s total revenues fell by 12.1% but the recovery was swifter than the decline.

In 2021, sales bounced back by 41.5% year-over-year and were followed in 2022 by a 21.7% rise. Last year, the top line grew again by 20.8% to reach an unprecedented $1.09 billion.

Shake Shack also snapped the streak of three consecutive years of adjusted pro-forma net losses. Comparing the latest numbers to those of five years ago in 2019, the top line has grown by a monstrous 82.9%, though operating income is still down by 40.9%. In absolute terms, though, operating income fell from $26.7 million to $15.8 million. 

Rising Margins Bode Well

The company’s expanding margins have also been quite impressive, specifically what the company describes as shack-level operating profit margins. This is an important metric of Shake Shack’s financial performance, as “shack sales”, or sales generated at the store level excluding licensed locations, made up about 96% of total sales.

Shack-level operating profit margin has experienced sustained growth over the past four years from 14.1% in 2020 to 16.7% in 2021 and from 17.5% in 2022 to 19.9% in 2023.

The 2023 margin also reflects improvement in every operating expense line item at the shack level, as a result of strategizing a number of factors like sales, menu prices, and supply chain efficiencies.

Another metric that has seen continuous growth is the system-wide shack count which refers to the total number of same-store or licensed locations.

This number close to doubled from 275 in 2019 to 518 in 2023. Last year, Shake Shack opened 41 new domestic company-operated shacks and 44 new licensed shacks.

Given that new locations are so crucial to growth in the restaurant sector, the persistent growth even during the challenging 2020-21 era bodes very well for long-term shareholders.

Shake Shack Is Still Early

With just over 500 locations, Shake Shack can’t be categorized as a mature company yet. McDonald’s (NYSE:MCD) for example, has about 40,000 locations in over 100 countries.

The upside of being so early is that Shake Shack has a lot of room for footprint expansion. As a testament to the opportunity, the company expects to open ballpark 40 domestic company-operated locations and around 40 licensed locations this year.

In addition, margin expansion remains a priority this year and shack-level operating profit margin is forecast to land between 20% and 21%.

One area of notable concern is the effect inflation will have on input costs. That pesky inflation is still affecting raw material prices like beef, which are expected to clock in the mid-to-high single-digit growth in 2024.

The company stated that it had recognized opportunities across its supply chain to reduce food and paper costs, such as increasing the number of suppliers and optimizing freight. Overall, total food and paper costs are expected to either remain flat or grow by low-single digit percentages this year.

To support margin expansion, Shake Shack is heavily investing in online initiatives and digitization. In 2023, the company finished its kiosk retrofit program and reported having kiosks in approximately 95% of its domestic company-operated Shacks.

This is also the company’s fastest-growing and highest-margin channel so it’s no surprise to hear that management is dedicated to further kiosk rollouts this year.

So, Should Shake Shack Be In Your Portfolio?

On the positive side, 8 analysts have revised their estimates higher for Shake Shack during the upcoming quarter. And while a 166x price-to-earnings ratio seems sky high it’s not actually as elevated as it may seem given that net income is forecast to rise by 42.4% annually over the next 5 years.

Those estimates are likely the prime driver behind the share price soaring close to 52-week highs and have also extended the valuation. While analysts still see 11.7% upside opportunity to fair value of $113.65 per share, a discounted cash flow forecast analysis pegs the intrinsic value closer to $80 per share, suggesting as much as 19.8% downside.

On a valuation analysis, it’s a mixed bag while on a multiples basis, trading at 3.8x price-to-sales is a bit steep. Where bulls can cling onto hope is the PEG of just 0.69, suggesting the stock is undervalued based on forecasted earnings growth.

As the company plans to keep growing its footprint, one key balance sheet line item to pay attention to is the level of debt the company is saddling, which is currently moderate. And liquidity poses no threats too but they are worth watching like a hawk to see if expansion is too aggressive and fueled by borrowings.

All in all, the future appears very attractive for Shake Shack, though a pullback would make entry more attractive from a reward to risk standpoint.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.