The downgrade of Shake Shack (SHAK) to “underperform” by Jefferies appears to have made investors skeptical of the company’s future earnings, leading to a fall in its stock price. As of December 22, 2017, Shake Shack was trading at $44.79, a fall of 3.1% from its previous day’s closing price.
In 3Q17, Shake Shack had posted EPS (earnings per share) of $0.17 on revenues of $94.6 million. Analysts had predicted the company would post EPS of $0.15 on revenues of $94.5 million. The company also outperformed analysts’ SSSG (same-store sales growth) estimate of -2.6% with actual SSSG of -1.6%. After its 3Q17 earnings, Morgan Stanley upgraded the stock from “underweight” to “equal weight.” All these factors appear to have increased investors’ confidence, leading to a rise in the company’s stock price. Since the announcement of 3Q17 earnings, the company’s stock price has risen 20.6%.
Since the beginning of 2017, Shake Shack’s stock price has increased by 25.1%. During the same period, Chipotle Mexican Grill (CMG), Jack in the Box (JACK), and Wendy’s (WEN) have returned -21.8%, -10.6%, and 21.6%, respectively. The broader comparative indices, the S&P 500 Index (SPX), and the iShares US Consumer Services ETF (IYC) have returned 19.9% and 19.1% year-to-date, respectively.
Valuation multiples help investors in accessing comparable companies. For our analysis, we have opted for the forward PE (price-to-earnings) multiple due to the high visibility in Shake Shack’s earnings. On December 22, 2017, Shake Shack was trading at a forward PE multiple of 81.8x. On the same day, Chipotle, Wendy’s, and Jack in the Box were trading at 31.9x, 30.2x, and 20.8x, respectively.
For the next four quarters, analysts are expecting Shake Shack to post revenue of $427.6 million, which represents year-over-year growth of 27.3%. During the same period, the company’s EPS is expected to fall 5.4%.