How Does Shake Shack’s Valuation Compare with Peers?



Valuation multiple

As Shake Shack (SHAK) has been in the growth phase of its business life cycle, we’ll look at the forward EV-to-sales (enterprise value to sales) ratio. During the growth phase, the operating expenses of the company will be on the higher side. So, EPS (earnings per share) cannot be considered for its valuation. The forward EV-to-sales ratio is calculated by dividing the company’s enterprise value from analysts’ sales estimate for the next four quarters.

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Shake Shack’s EV-to-sales ratio

The introduction of new menu items appears to have increased investors’ confidence, leading to a rise in Shake Shack’s stock price and its valuation multiple. As of September 22, 2017, Shake Shack was trading at a forward EV-to-sales multiple of 2.82x compared to 2.62x on August 30, 2017.

From the above graph, we can see that Shake Shack is trading above its peers. Shake Shack being in a growth phase of its business life cycle has a huge scope to expand, which is a factor that markets highly value. On September 22, 2017, Chipotle Mexican Grill (CMG) and the Cheesecake Factory (CAKE) were trading at forward EV-to-sales multiples of 1.7x and 0.8x, respectively.

For the next four quarters, analysts are expecting Shake Shack to post revenue growth of 25.4%, which could have been factored into the company’s stock price. If the company posts earnings lower than analysts’ estimates, the selling pressure could bring the company’s stock price and valuation multiple down.

Analysts’ recommendations

Of the 11 analysts that follow Shake Shack, 45.5% are recommending a “buy,” 36.4% are favoring a “hold,” and 18.2% are recommending a “sell” option. In the next 12 months, analysts are expecting Shake Shack’s stock price to reach $38.67 in the next 12 months, which represents a return potential of 17.6%.


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