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How Shake Shack’s Valuation Compares with Peers

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Valuation multiples

Valuation multiples help investors compare companies with similar business models. As Shake Shack (SHAK) is still in the growth phase of its business cycle, expenses will likely be on the higher side and earnings cannot be considered for valuation. So, we have opted to look at the forward EV-to-sales (enterprise-value-to-sales) ratio. The forward EV-to-sales ratio is calculated by dividing the enterprise value with analysts’ sales estimates for the next four quarters.

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Forward-EV-to-sales multiple

Although the stock price of Shake Shack has increased since the beginning of 2017, the valuation multiple has declined as investors have increased their sales estimates for the next four quarters. As of March 19, 2018, Shake Shack was trading at a forward EV-to-sales multiple of 3.1x compared to 3.6x at the beginning of 2017.

From the above graph, we can see that Shake Shack is trading above its peers’ median value. Being in a growth phase of its business cycle, Shake Shack has a huge scope to expand its business, which is valued highly by the market. On the same day, peers Chipotle Mexican Grill (CMG), Jack in the Box (JACK), and Wendy’s (WEN) were trading at a forward-EV-to-sales multiple of 1.7x, 2.3x, and 4.1x, respectively.

Growth prospects

To drive its SSSG (same-store sales growth), Shake Shack is focusing on menu innovations and customer experience improvements through the implementation of technological advancements. For the next four quarters, analysts are expecting Shake Shack’s revenue to rise 25.2%, which could have been already factored into its current stock price. If the company posts revenue lower than analysts’ estimates, the selling pressure could bring the company’s stock price and valuation multiple down.

Next, we’ll look at analysts’ recommendations for Shake Shack.

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