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Shake Shack Stock Is Believed To Be Significantly Overvalued

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GF Value
Mar 30, 2021
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The stock of Shake Shack (NYSE:SHAK, 30-year Financials) gives every indication of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $111.43 per share and the market cap of $4.7 billion, Shake Shack stock appears to be significantly overvalued. GF Value for Shake Shack is shown in the chart below.


Because Shake Shack is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 0.5% over the past three years and is estimated to grow 19.62% annually over the next three to five years.

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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Shake Shack has a cash-to-debt ratio of 0.48, which is in the middle range of the companies in Restaurants industry. GuruFocus ranks the overall financial strength of Shake Shack at 4 out of 10, which indicates that the financial strength of Shake Shack is poor. This is the debt and cash of Shake Shack over the past years:


Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Shake Shack has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $522.9 million and loss of $1.13 a share. Its operating margin is -6.45%, which ranks in the middle range of the companies in Restaurants industry. Overall, the profitability of Shake Shack is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of Shake Shack over the past years:


Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Shake Shack is 0.5%, which ranks in the middle range of the companies in Restaurants industry. The 3-year average EBITDA growth rate is -72.4%, which ranks in the bottom 10% of the companies in Restaurants industry.

One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Shake Shack's ROIC is -3.49 while its WACC came in at 11.47. The historical ROIC vs WACC comparison of Shake Shack is shown below:


In closing, Shake Shack (NYSE:SHAK, 30-year Financials) stock is estimated to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Restaurants industry. To learn more about Shake Shack stock, you can check out its 30-year Financials here.

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