Shake Shack – How Safe Is It As An Investment?

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May 26, 2015

In yet another record-breaking share market feat, iconic New York City fast food chain Shake Shak Inc. (SHAK, Financial) saw the share price climb to the day’s high, and an all-time high, of $96.74, amid rumors of an expansion of the burger joint into also dishing out chicken sandwiches.

On April 20, a subsidiary of the parent company called "SSE IP" filed for an application to trademark the name ‘Chicken Shack’ for chicken sandwiches. Shake Shack has remained mum on the matter, while shares have surged by almost 33% since news of the matter broke last week.

“Shake Shack was born from a fine dining company, and we constantly test new menu items in our test kitchen. We have no new items to announce at this time, except for the new ParkBurger at New York's Madison Square Park, which reopened today,” CNBC quotes a statement from the company as saying.

There is no logo or company information on the trademark application and market watchers expect menu diversification from the fast food chain, if the rumors turn out to be true. The NPD group, a research firm, reports that chicken-related fast food is a faster growing market segment compared to burgers. Fast food restaurants saw chicken entrees grow by 3% to 5.4 billion in the fiscal ended March 31, 2015, compared to cheeseburger servings which grew by only 1% to 7.9 billion.

Currently, the only menu item with chicken at Shake Shack is the Chicken Dog.

Shack on the upsurge

Since its initial public offering in January, the fast food chain’s market value has more than quadrupled. Earlier in May, the company reported 56% increase in sales, in its quarterly earnings report. The revenue outlook for the rest of the year was raised from the $159 million to $163 million range to $161 million and $165 million range, at that time. They operate out of 66 locations worldwide and plan to add 10 more stores by the end of 2015.

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Most industry watchers are eyeing the trademark application eagerly and hoping for the expansion. They believe that loyal lunchgoers will do the newly added menu items or expansion of operations justice.

No Shack for me

But not everyone is so positive about their outlook of the Shack.

Although Shake Shack’s stock added almost 10% in trading on Thursday and climbed by 3.33% to $92.86 during trading hours in New York on Friday, overvaluation is a big concern with some analysts. When Wall Street bid Shack stock up by a massive 130% when it filed its IPO earlier this year, Tim Taulli from InvestorPlace expressed his shock over the overvaluation of Shack stock. “… To put things in perspective, rival Habit Restaurants Inc. (HABT, Financial) is currently trading at 1.8 times sales, while El Pollo LoCo Holdings Inc. (LOCO, Financial) is at 3X. Larger fast-casual companies are much cheaper, too — Chipotle Mexican Grill, Inc. (CMG, Financial) is at 5.7X and Panera Bread Co (PNRA, Financial) sports a multiple of 1.8X,” he wrote at the time in an article cautioning investors to ‘buy the burger, not the stock’.

Even today, Shack stock is valued higher than more successful business competitors such as Chipotle, Zoe’s Kitchen Inc. (ZOES, Financial) and Bojangles Inc. (BOJA, Financial). But John Divine, InvestorPlace Assistant Editor, points out the fallacy in this valuation.

“If Shake Shack could seriously threaten the likes of Chick-Fil-A and KFC (YUM, Financial), shares would be worthy of a big day… But all things are not equal… Chick-Fil-A has more than 1,900 stores, spanning 42 states and Washington, D.C. And KFC, for its part, boasts a whopping 14,197 locations across the globe. Shake Shack? Through April 1, it had 66 locations — worldwide,” he writes.

The Class A common stock lost 2% to $91 in after-hours trading on Friday. All six analysts polled by Zacks Investment Research give Shack stock a "Hold" rating.