How Shake Shack’s Valuation Multiple Compares with Its Peers


Feb. 23 2018, Updated 9:05 a.m. ET

Valuation multiple

With Shake Shack (SHAK) still in the growth phase of its business life cycle, we’ll use the forward-EV[1. enterprise value]-to-sales multiple. The forward-EV-to-sales multiple is calculated by dividing the company’s current enterprise value from analysts’ earnings estimate for the next four quarters.

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Forward PE multiple

The lower-than-expected sales guidance provided by Shake Shack’s management for 2018, as well as fear of cannibalization from newly opened restaurants, appear to have concerned investors regarding its future earnings. These factors led to a fall in SHAK’s stock price and valuation multiple.

On February 16, 2018, Shake Shack was trading at a forward-EV-to-sales multiple of ~2.9x compared to 3.1x before the announcement of the company’s 4Q17 earnings.

From the chart above, we can see that Shake Shack is trading above its peers’ median valuation multiples. Shake Shack is still in the growth phase of its business life cycle. As a result, it has a higher growth opportunity, which is valued by the market.

On the same day, Shake Shack’s peers Chipotle Mexican Grill (CMG), Wendy’s (WEN), and Jack in the Box (JACK) traded at ~1.7x, ~5.1x, and ~2.5x, respectively.

Growth prospects

To drive its sales, Shake Shack is focusing on menu innovations, implementation of digital advancements, and improving foundational infrastructure to support its growth. For the next four quarters, analysts expect the company’s revenues to grow 25.6%, which could have been factored into the company’s current stock price.

If Shake Shack fails to generate the expected sales, the selling pressure can bring down the company’s stock price and its valuation multiple.

In the final part of this series, we’ll look at analysts’ recommendations for Shake Shack.


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