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How Does Shake Shack Compare to Its Peers?

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Dec. 4 2020, Updated 10:43 a.m. ET

Comparing with peers

Shake Shack (SHAK) has an enterprise value (or EV) to revenue multiple of 13.9x, compared to the peer average of 3.5x. 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 3.2x with an anticipated annual growth rate of 23%. Starbucks (SBUX), which is expected to have an annual sales growth of 10%, has an EV-to-revenue multiple of 4.2x.

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Apple (AAPL) is currently trading at an EV-to-revenue multiple of 2.1x with an annual growth rate of 5.3%, and Under Armour (UA), which has a growth expectation of 23% annually, is trading at an EV-to-revenue of 5.1x. We compare restaurants against retailers in the chart above since these retailers are the best in the United States and they rely on same-store sales growth just as restaurants do.

Is Shake Shack overvalued?

Based on this valuation, Shake Shack is trading at 3.6 times the average peers’ valuation. As we stated earlier, this may mean that the company is overvalued or that 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’s portfolio.

In Shake Shack’s upcoming earnings release, expected on August 10, 2015, same-store sales growth should be the most important driver to watch out for. We’ll cover these earnings, so make sure to return to Market Realist for the update.

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