The stock of Shake Shack (NYSE:SHAK, 30-year Financials) is believed to be 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 $106.06 per share and the market cap of $4.5 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 19.79% annually over the next three to five years.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company’s financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Shake Shack has a cash-to-debt ratio of 0.65, which which ranks in the middle range of the companies in Restaurants industry. The overall financial strength of Shake Shack is 3 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:
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 $535 million and loss of $1.09 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:
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 better than 72% 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.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Shake Shack’s return on invested capital is -3.62, and its cost of capital is 10.88. The historical ROIC vs WACC comparison of Shake Shack is shown below:
In closing, the stock of Shake Shack (NYSE:SHAK, 30-year Financials) appears 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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