Premium burger chain Shake Shack (NYSE:SHAK) has been absolutely crushed amid the coronavirus pandemic, and with good reason. This is a fast food chain that has been forced to pivot to a “to-go” model in all of its U.S. stores. The company also has broad exposure to the greater New York area, which has turned into the global epicenter of the outbreak.
SHAK stock has dropped 60% off its mid-February highs. For longer-term investors, this sell-off looks like a buying opportunity. For five big reasons:
- The coronavirus pandemic headwind won’t last forever. Consensus modeling suggests that Covid-19 will peak in the U.S. around mid-April, and be largely in the rear-view mirror by June.
- Shake Shack has ample liquidity to weather this storm. The company doesn’t have the strongest of balance sheets, but it does have enough liquidity to keep the lights on for the next few months while traffic is majorly depressed.
- Traffic and sales will rebound by summer. Significant monetary and fiscal stimulus will unleash pent-up consumer demand and turn it into robust discretionary spending in June, July, and August.
- The stock is incredibly cheap at current levels. On a price-to-sales basis, SHAK stock has never been cheaper, and trades at a 70% discount to its normal price-to-sales valuation.
- Long term potential upside is compelling. In the long run, Shake Shack is still well positioned to rapidly expand its store base and drive huge revenue and profit growth.
As such, I think it may be time to start nibbling away at this dip in Shake Shack stock. Near-term downside risks appear largely priced in, and medium- to long-term upside potential seems quite large.
Coronavirus Won’t Last Forever, SHAK Stock Will Rebound
Arguably the most important part of the Shake Shack bull thesis is that the coronavirus pandemic won’t last forever.
Consensus modeling, based on how the virus has progressed in various other countries in response to social distancing measures, projects the number of new coronavirus cases in the U.S. to peak sometime in mid-April. By late May, the U.S. will be where China is today — that is, close to near-zero new cases, with the number of active cases rapidly dropping.
Assuming the pandemic does follow this consensus trajectory, then by June, the coronavirus pandemic will be largely in the rear-view mirror, the U.S. economy will gradually return to normal, and Shake Shack stores across America will re-open and get back to business as usual.
SHAK Stock Has Ample Liquidity to Weather the Storm
Shake Shack’s balance sheet isn’t great. The company has negative working capital. That is, its near-term liabilities outnumber its near-term assets.
That’s not a great position to be in during this crisis.
However, thanks to $50 million available under a revolver (which can be boosted to $150 million, if needed), Shake Shack can tap into somewhere between $120 million and $220 million in immediate liquidity over the next few months. Given that this is a cash flow positive business with a relatively small store and expense base, Shake Shack appears to have enough liquidity to weather the storm over the next few months and keep its lights on.
Traffic & Sales Will Rebound
Some pundits argue that the world will forever change as a result of the coronavirus pandemic. It probably will. But … consumers will still do things. They will still travel. They will still eat out. And they will still shop at malls, go to the movies, and go on cruises.
If anything, my thinking is that consumers will actually do some of these things more once the pandemic ends. That’s because consumers across the U.S. have been cooped up inside for weeks, unable to do anything besides watch Netflix (NASDAQ:NFLX), go for walks, and shop for groceries.
When these consumers are finally able to go out to a Shake Shack again, they will. Especially since there’s a ton of monetary and fiscal stimulus in the pipeline, the sum of which should turn pent-up consumer demand into robust consumer discretionary spending.
By the summer, I fully expect Shake Shack’s traffic trends to normalize towards 85% to 90% of normal, and get back to 100% normal by the end of the year.
SHAK Stock’s Attractive Entry Point
From a valuation perspective, this is as attractive an entry point into Shake Shack stock as there has ever been.
At present, SHAK stock trades at 1.7-times trailing sales. That’s an all-time low sales multiple for this stock. The normal trailing sales multiple for SHAK stock is 5.2. That means the stock currently trades at a near 70% discount to where it normally trades.
It’s also worth noting that the last time Shake Shack had a market cap this low, the company operated less than 150 restaurants. By the end of 2020, Shake Shack will operate about 340 restaurants.
Huge Long-Term Upside Potential
The coronavirus pandemic does not alter this company’s long-term growth trajectory.
Shake Shack is still a premium burger chain, which will leverage quality-first demand trends to expand nationally from 275 stores today, to 1,000-plus stores over the next decade. During that stretch, the company will see its sales and profits grow by leaps and bounds, and the company’s market cap has a very realistic pathway to shooting above $5 billion.
Today, the market cap sits at just $1.4 billion. Thus, the long-term upside potential from current levels is quite enormous.
Bottom Line on SHAK Stock
The huge sell-off in SHAK stock makes complete sense in the context of this is a fast food chain operating at a time when no one is eating out.
But, this pandemic-stricken era won’t last forever. By summer, the coronavirus pandemic will largely be over. The U.S. economy will normalize. Consumers will start eating out again. And Shake Shack stock will rebound.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities, but may initiate a long position in SHAK within the next 72 hours.