On Wednesday afternoon, Shake Shack Inc. (NASDAQ:SHAK) reported earnings and everyone was thrilled. The market sent the stock up 4% before the report, and then 10% in after-hours trading.
Let’s analyze the numbers. When you see them, you’ll be left scratching your head along wondering why this company is valued at $2.5 billion. Yes, it all looks good and even tastes good, but it’s going to give you indigestion.
Total SHAK revenue increased 56% to $37.8 million. Store sales, which the company calls “Shack sales” increased 59.2% to $36 million. Same-store SHAK sales leapt 11.7% versus 3.9% last year. Operating profit at the SHAK level increased 78.3% to $9.3 million. And adjusted SHAK EBITDA increased 94% to $7 million.
Oh, but the net SHAK loss was $12.7 million, or $1.06 per share. Now, this happened to include $13.2 million of after-tax expenses associated with the IPO, so actual operating earnings came in at $500,000. Adjusted pro forma net income for SHAK increased 102.2% to $1.3 million, or 4 cents per share, compared to $0.6 million, or 2 cents per share last year.
For those of you who are new to the SHAK story, how many stores do you think the company runs to catch that valuation? Hint: exactly 66. That’s it. Yep, a company that sells nothing more than the burgers, fries, and milkshakes fetches a $2.5 billion valuation.
No Justification for SHAK Stock Valuation
I’m going to state that this has to be one of the most bogus IPOs I’ve seen in a long time. To give you a sense of scale, McDonald’s Corporation (NYSE:MCD) has 36,000 stores and is valued at $93 billion, or $2.6 million per store. That’s why it costs so much to buy a franchise.
Burger King and Tim Horton’s, which now operate under the Restaurant Brands International Inc (NYSE:QSR) ticker, is valued at $19.4 billion with 19,000 restaurants, or about a million bucks per store.
Wendy’s Co (NYSE:WEN), which has been really struggling, has its 6,500 stores valued at $4.1 billion, or $630,000 per store.
Shake Shack stores are being valued at $38 million per store.
Now, you may say that the incredible growth makes this valuation reasonable. I say, look at Chipotle Mexican Grill, Inc. (NYSE:CMG), which is more mature with 1,800 stores, has no debt, and is sweeping the nation. Its 1800 stores are valued at $19.7 billion, or about $11 million per store.
Yet SHAK stock, with a mere $500,000 profit from the last quarter, is fetching a $2.5 billion valuation.
This is simply ridiculous. It speaks to the irrational level the market has reached regarding IPOs, and it makes me nervous for the market overall. When things get this frothy, it suggests a bubble not just in the IPO market, but the whole market.
But hey, let’s just hang on. Maybe I’ve got this wrong. Let’s say that Shake Shack doubles it earnings every year for the next three years, beginning with a run-rate of $2 million per year. That would take the company to $32 million in profit, or $2.80 per share in earnings. Congratulations, you would be paying 26x expected FY19 earnings at just today’s price — assuming everything goes perfectly.
Let’s face it. This is a bogus IPO. It is a transparent attempt by management to cash out while things are hot. Hey, more power to them! That’s capitalism. But were I looking at these numbers, I’d seriously consider going short once the momentum calms down. If I were an investor, I’d get out now, regardless of losing potential upside. If you insist on staying in, then at least set a stop-loss. If you are still in when earnings roll around next time, you better buy some puts.
Yet that’s the problem, isn’t it? Momentum stocks go crazy and there’s no telling when the Greater Fool will bail out. There is simply no way to tell when the rocket runs out of fuel and if you are trying to short SHAK stock, you could get blasted out of the solar system.
I’ve eaten at Shake Shack. It’s okay. It’s a cut above most fast food burger joints, but hardly worth going out of my way to eat there. There’s nothing special or proprietary about it, so were I you, I would avoid this stock completely.
Lawrence Meyers does not have a position in any stock mentioned. He is the CEO of PDL Capital, a specialty lender focusing on consumer finance. Lawrence has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He is the Manager of the forthcoming Liberty Portfolio. He can be reached at TheLibertyPortfolio@gmail.com.
