Credit Suisse’s “outperform” rating for Shake Shack (SHAK) appears to have increased investors’ confidence. The stock was trading ~2.0% higher in early morning trade on June 25. The company has returned 46.9% YTD (year-to-date) as of June 24. Shake Shack has easily outperformed the broader equity market. The S&P 500 Index has increased 17.5% since the beginning of 2019. McDonald’s (MCD) and Chipotle Mexican Grill (CMG) have returned 14.8% and 67.7%, respectively.
The better-than-expected sales in the fourth quarter of 2018 and the first quarter and the higher 2019 guidance from the company’s management likely led to a rise in Shake Shack’s stock price.
The increase in Shake Shack’s stock price since the beginning of 2019 has also raised its valuation multiple. As of June 24, Shake Shack was trading at a forward PE ratio of 104.5x compared to 62.3x at the beginning of 2019. McDonald’s and Chipotle were trading at a forward PE ratios of 24.4x, and 48.9x, respectively.
Shake Shack is still in a growth phase. The company has enormous scope to expand. The scope for expansion is valued highly by the market. The scope has allowed the company to trade at a higher valuation multiple.
For 2019, analysts expect Shake Shack to report revenues of $586.2 million—a rise of 27.6% from $459.3 million in 2018. During the same period, the company’s adjusted EPS is expected to fall 18.3% to $0.58.