uploads///Forward EV Revenue Growth and Revenue Growth

Is Shake Shack’s Valuation Still High?

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Nov. 20 2020, Updated 3:54 p.m. ET

Is Shake Shack’s valuation multiple high?

Shake Shack’s (SHAK) NTM (next 12 months) PE is currently at 407x, and is far from the industry peer average multiple of 27.3x. The S&P 500 is trading at 18x. But does this mean that the company is overvalued?

Using the PE multiple for valuing Shake Shack may not be appropriate because the company is in its early growth stage and has volatile earnings. In 4Q14, Shake Shack had a negative EPS (earnings per share), which makes forward PE unusable, so we need a better valuation multiple to measure Shake Shack.

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Using enterprise value to revenue

For a company that is in its early stage of growth, it is helpful to use the enterprise value (or EV) over the NTM revenue as the valuation multiple. Shake Shack has an EV-to-revenue multiple of 11.3x, compared to the peer average of 3.5x. Analysts are estimating a sales growth of 19% for the company’s forward two-year compounded annual rate. Usually if the company’s valuation multiple is above the industry average, it means that the stock is overvalued. But this may not necessarily be true, because a company’s valuation multiple can be supported by high growth and low risk prospects.

Restaurant peer Habit Burger Grill (HABT) is trading at 3.5x with a similar anticipated annual growth rate of 20%. Starbucks (SBUX), which is expected to have an annual sales growth of 13.3%, has an EV-to-revenue multiple of 4.03x.

Apple (AAPL) is currently trading at an EV-to-revenue multiple of 2.44x with an annual growth rate of 4.7%, and Under Armour (UA), which has a growth expectation of 24% annually, is trading at an EV-to-revenue of 4.7x. We compare restaurants against retailers in the chart above since these retailers are the best in the US and rely on same-store sales growth just as restaurants do.

Is Shake Shack overvalued?

Based on this valuation, Shake Shack is trading at 3.3 times the average peer valuation. As stated earlier, this may mean that the company is overvalued or investors are expecting a lot of room for the company’s revenue growth.

To mitigate risks, investors might want to consider the Consumer Discretionary Select Sector SPDR ETF (XLY). McDonald’s (MCD) makes up about 4% of XLY.

In Shake Shack’s upcoming earnings release expected on August 12, 2015, same-store sales growth will be the most important driver to watch out for. We will cover earnings, so make sure to return to Market Realist for the update. In the meantime, you can browse through our restaurant industry page for other important updates.

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