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Shake Shack’s Valuation Multiple Rose on Strong 1Q18 Earnings

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May. 9 2018, Updated 6:30 a.m. ET

Valuation multiple

As Shake Shack (SHAK) is still in the growth phase of its business cycle, its operating expenses should be high, and earnings per share can’t be considered for its valuation. So we’ve opted for the forward EV-to-sales (enterprise value to sales) ratio. The forward EV-to-sales multiple is calculated by dividing the company’s enterprise value with analysts’ revenue expectations for the next four quarters.

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SHAK’s forward EV-to-sales multiple

The strong 1Q18 earnings and raising of 2018 sales guidance by Shake Shack’s management appear to have increased investors’ confidence, leading to a rise in the company’s stock price and its valuation multiple. As of May 4, Shake Shack was trading at a forward EV-to-sales multiple of 4.1x, compared to 3.5x before the announcement of 1Q18 earnings.

Shake Shack is in a growth phase and has a huge scope to expand its business, which investors highly value. The scope to expand has allowed the company to trade at a higher valuation multiple than its peers’ median. On the same day, its peers Chipotle Mexican Grill (CMG), Jack in the Box (JACK), and Wendy’s (WEN) were trading at a forward EV-to-sales multiple of 2.2x, 2.4x, and 4.1x, respectively.

Growth prospects

To drive SSSG, Shake Shack is focusing on menu innovations, digital advancements, and improving foundational infrastructure to support growth. For the next four quarters, analysts expect Shake Shack’s sales to increase 26.2%, which could have been incorporated into the company’s current stock price. If the company posts sales lower than analysts’ expectations, the selling pressure can bring the company’s stock price and valuation multiple down.

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

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