Has Shake Shack Reached Buying Levels for Investors?

As of March 13, Shake Shack (NYSE:SHAK) was trading at $43.56—a fall of 35.0% since the beginning of 2020. Concerns about the coronavirus caused a sell-off around the world. The S&P 500 Index fell by 16.1% during the same period. Along with the global sell-off, the weak fourth-quarter sales and lower-than-expected 2020 guidance led to a fall in the company’s stock price. Shake Shack has underperformed McDonald’s (NYSE:MCD) and Chipotle Mexican Grill (NYSE:CMG), which have fallen by 10.4% and 24.7%, respectively. During the same period, Jack in the Box (NASDAQ:JACK) has declined by 44.2%.

As of the closing on March 13, Shake Shack traded 8.5% higher than its 52-week low of $35.67 and 63.4% lower to its 52-week high of $105.84. So, has the stock bottomed out? First, we’ll look at analysts’ expectations for 2021.

Analysts’ revenue expectations for Shake Shack

Shake Shack’s management expects its 2020 revenue to be $712 million–$720 million. The company plans to open 40–42 company-owned restaurants and 20–25 licensed restaurants in 2020. Meanwhile, management projects the company’s SSSG to fall by low single-digits. Analysts expect Shake Shack to report revenue of $716.6 million in 2020—a rise of 20.5% from $594.5 million in 2019. Opening new company-owned and franchised restaurants will likely drive Shake Shack’s revenue.

In August 2019, the company opted to go with Grubhub as its only integrated and marketed delivery partner. However, only one-quarter of Shake Shack’s restaurants were solely integrated with Grubhub by the end of the fourth quarter. The delay in integration led to slower sales growth from delivery. So, management expected considerable volatility in delivery sales this year. Also, management cautioned that the coronavirus outbreak could impact the company’s SSSG and new restaurant openings in Asia.

2020 EPS will likely fall

Analysts expect Shake Shack to report an adjusted EPS of $0.53—a fall of 27.1% from $0.72 in 2019. The decline in the EBITDA margin, higher depreciation and amortization expenses, and increased interest expenses could lower the company’s EPS. However, higher revenue could offset some of the declines in the EPS. Analysts expect Shake Shack’s EBITDA to fall from 13.8% in 2019 to 12.0% in 2020. The sales deleverage from negative SSSG and higher SG&A expenses due to an increase in the company’s investment in growth initiatives could lower its EBITDA margin.

Valuation multiple

The recent decline in Shake Shack’s stock price also brought its valuation multiples down. As of March 13, the company was trading at a forward PE ratio of 71.3x compared to 96.6x at the beginning of this year. Despite the fall, Shake Shack is still trading at a premium compared to its peers. On the same day, Chipotle, McDonald’s, and Jack in the Box were trading at 32.5x, 20.5x, and 9.1x, respectively. Shake Shack is still in the growth phase and has considerable scope to expand its operations. As a result, the company has traded at a higher valuation multiple.

On March 13, Shake Shack was trading at 83x analysts’ 2020 EPS estimate and at 71.1x analysts’ 2021 EPS estimates. Meanwhile, analysts expect the company’s EPS to fall by 27.1% in 2020 to $0.53. They expect the company’s EPS to rise by 16.7% to $0.61 in 2021.

Analysts’ recommendations

On March 11, Stifel cut its target price from $60 to $45, while Wedbush lowered its target price from $75 to $50. Since Shake Shack reported its fourth-quarter earnings on February 24, J.P. Morgan, CFRA, SunTrust Robinson, Morgan Stanley, Deutsche Bank, Credit Suisse, Piper Sandler, and Jefferies have all lowered its target price. As of March 13, analysts’ consensus target price was $67.38, which represents a 12-month return potential of 74.1%.

Wall Street favors a “hold” rating for Shake Shack. Of the 18 analysts that follow the stock, 66.7% recommend a “hold,” 22% recommend a “buy,” and 11.1% recommend a “sell.”

My take on Shake Shack

Today, ABC News reported that 3,244 coronavirus cases have been reported in the US with at least 61 deaths related to the outbreak. On March 13, the Trump administration declared a national emergency. Meanwhile, governors in some states have shut down all of the bars and restaurants. Some governors asked restaurants to operate at a lower capacity.

Shake Shack faces integration issues on the delivery front when customers aren’t willing to venture out. I expect government restrictions and the company’s delivery issues to have a significant impact on its SSSG. I expect Shake Shack’s stock price to be under pressure for the near time. Notably, investors could get better entry levels than the current one.