Shake Shack Inc (SHAK) stock has had a rough go of it over the last year … and the pain may not be over yet. Shares of the burger joint are down 47% in the last 52 weeks, and are off 9% in 2016.
The company will report first quarter earnings before the markets open on Thursday, May 12, in a report that could have a profound impact on SHAK stock. When it comes to beating or missing on Wall Street earnings estimates, it’s always a coin toss, but I think Shake Shack has quite a lot to prove to investors given its currently frothy valuation.
Admittedly, a rich valuation has been part of SHAK stock’s M.O. since its debut on the public markets in January 2015, but I really believe investors have become more discerning and risk-averse after a tumultuous first quarter of trading in 2016.
SHAK Stock: 74 Times Forward Earnings?
I’ve eaten at Shake Shack. It’s good. I much prefer its burgers to those of Wendys Co (WEN), McDonald’s Corporation (MCD) or Jack in the Box Inc. (JACK), which makes sense given the premium pricing and marketing focus on quality. But paying 74 times forward earnings for SHAK stock? A burger joint? I simply can’t get behind that.
Analysts expect SHAK stock to post earnings per share of 5 cents in the first quarter, up from 4 cents in the year-ago period. Arguably far more important is where revenue comes in, since earnings shortfalls can be cured over time with meteoric sales growth.
Wall Street is expecting SHAK to report revenue of $52.06 million in the first quarter, up 37.7% from the $37.81 million in sales it had just a year ago.
That’s an impressive rate, no doubt. I’m not overly worried about the first quarter — I’m concerned about longer-term trends. Sales growth is expected to decline from 60.8% in 2015 to 27.4% in 2016, to less than 24% in 2017. Same-store sales growth, which the company lamely dubs “same-shack sales”, came in at a really impressive 13.3% in 2015.
But what sort of same-shack sales growth can SHAK stock owners expect in 2016? Between 2.5% and 3%. That’s a remarkable deceleration, and frankly, it elicits memories of the plunging SSS growth we saw from Chipotle Mexican Grill, Inc. (CMG) before shares crashed and burned over the last year.
Don’t be surprised if SHAK stock takes a tumble if Shake Shack modestly beat on earnings and revenue but keep guidance static. The whole problem with high expectations is the increased propensity to disappoint, and analysts are projecting higher revenue than Shake Shack itself is for 2016. Similarly, the earnings “whisper” number for Q1 is 7 cents per share, not 5.
Sure, Shake Shack shares have taken a major tumble over the last year. But I think shareholders are still pricing this burger joint rather optimistically. Short-term, the stock’s a coin flip. Longer-term, the odds seem stacked against it.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
