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Correction in Shake Shack’s Stock Price: A Buying Opportunity?

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Shake Shack’s stock performance

As of November 27, Shake Shack (SHAK) was trading at a stock price of $50.99, which represents a fall of 7.0% since the announcement of its third-quarter earnings on November 1. Currently, Shake Shack is trading 39.4% higher than its 52-week low of $36.58 and 27.3% lower than its 52-week high of $70.12.

In the third quarter, which ended on September 26, Shake Shack posted an adjusted EPS of $0.21 on revenues of $119.6 million. Shake Shack outperformed analysts’ EPS expectation of $0.17 and revenue estimate of $117 million. After posting the third-quarter earnings, Shake Shack’s management also raised its revenue guidance for 2018.

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However, Shake Shack’s SSSG (same-store sales growth) declined 0.7% during the quarter compared to analysts’ expectation of a rise of 1.1%. The decline in the SSSG was due to a decline of 4.0% in the traffic at Shake Shack restaurants. The lower-than-expected SSSG made investors skeptical about Shake Shack’s aggressive expansion strategy, which caused the stock price to fall.

Year-to-date performance

Despite the recent decline in the stock price, Shake Shack has returned 18.0% YTD (year-to-date). During the same period, Chipotle Mexican Grill (CMG) and McDonald’s (MCD) have returned 63.8% and 7.3%, respectively. The broader comparative index, the Consumer Discretionary Select Sector SPDR ETF (XLY), which has invested 7.8% of its holdings in restaurant and travel companies, has returned 6.0% YTD.

Series overview

In this series, we’ll discuss analysts’ revenue and EPS expectations for 2018 and 2019. We’ll also discuss management’s guidance for 2018. Finally, we’ll look at analysts’ recommendations and Shake Shack’s valuation multiple.

Next, we’ll discuss analysts’ revenue expectations.

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