How the Valuation Multiple of Shake Shack Compares with Its Peers



Valuation multiple

For our analysis, we have opted for the forward EV[1.enterprise value]-to-sales ratio as Shake Shack (SHAK) is in the growth phase of its life cycle. In the growth phase, companies incur huge operating expenses, so earnings cannot be considered for analysis.

The forward EV-to-sales multiple is calculated by dividing the company’s enterprise value by analysts’ revenue estimates for the next four quarters.

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SHAK’s forward EV-to-sales multiple

To improve its same-store sales growth (or SSSG), Shake Shack has been focusing on menu innovations and the implementation of technological advancements. These measures appear to have increased investors’ confidence, leading to a rise in the company’s stock price and its valuation multiple.

On October 23, 2017, Shake Shack was trading at a forward EV-to-sales multiple of 2.93x compared to 2.91x before the announcement of its 2Q17 earnings.

From the above graph, we can see that Shake Shack is trading above its peers’ median. Being in a growth phase, Shake Shack has room to expand its business. This trend is valued by the market, leading to a rise in the company’s forward EV-to-sales ratio.

On the same day, Wendy’s (WEN), Chipotle Mexican Grill (CMG), and Jack in the Box (JACK) were trading at 5.0x, 1.8x, and 2.7x, respectively.

Forward PE multiple

For the next four quarters, analysts are expecting Shake Shack’s revenues to rise 25.4%, which could have been factored into the company’s stock price. If the company fails to generate sales in line with analysts’ expectations, the selling pressure can bring the company’s stock price and valuation multiple down.

In the final part of this series, we’ll look at analysts’ recommendations and their target prices.


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