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Shake Shack Stock Shows Every Sign Of Being Significantly Overvalued

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GF Value
May 11, 2021
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The stock of Shake Shack (NYSE:SHAK, 30-year Financials) shows every sign 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 $90.03 per share and the market cap of $3.8 billion, Shake Shack stock appears to be significantly overvalued. GF Value for Shake Shack is shown in the chart below.

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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 19.69% annually over the next three to five years.

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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Shake Shack has a cash-to-debt ratio of 0.65, which ranks in the middle range of the companies in Restaurants industry. Based on this, GuruFocus ranks Shake Shack's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Shake Shack over the past years:

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Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Shake Shack has been profitable 6 years over the past 10 years. During the past 12 months, the company had revenues of $522.9 million and loss of $1.13 a share. Its operating margin of -8.35% in the middle range of the companies in Restaurants industry. Overall, GuruFocus ranks Shake Shack's profitability as fair. This is the revenue and net income of Shake Shack over the past years:

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One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The 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 is -72.4%, which ranks in the bottom 10% of the companies in Restaurants industry.

Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Shake Shack's return on invested capital is -3.62, and its cost of capital is 10.81. The historical ROIC vs WACC comparison of Shake Shack is shown below:

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In closing, The stock of Shake Shack (NYSE:SHAK, 30-year Financials) shows every sign of being 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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