Shake Shack Stock a buy?
Better-Burger Company Shares Shake Shack (NYSE: SHAK) have already reached all-time highs earlier in 2021. But 2020 has not been a good year for this company. Society is heavily concentrated in urban areas, and these faced some of the most severe catering restrictions in the pandemic last year. For this reason, revenues for the last year have decreased by 12% compared to 2019.
As a result, trading results did not propel the Shake Shack share to all-time highs. Investors are quite excited about what the company is up to for growth. In fact, it is about to enter its biggest growth phase.
It’s time to shine
The management of Shake Shack has managed to divert investors’ attention from past difficulties to future opportunities by presenting an impressive pipeline of new restaurants. The company has both company-owned restaurants and accredited international locations. But as for those who own the company, the highest number of openings in a year was 39 in 2019.
For 2021, Shake Shack plans to open 35 to 40 new company-owned locations. In 2022, it plans to open 45 to 50 – more than the record number of 2019. As a prospect, the company ended 2020 with 183 company-owned restaurants. As a result, the number of its stores is expected to increase by around 45% over the next two years. It is ambitious.
And due to some fundraising moves in 2020, Shake Shack ended the year with nearly $ 147 million in cash – its record. Therefore, it is well capitalized to continue its aggressive growth plans.
It is important to note that the growth of company-owned restaurants is more meaningful to shareholders than the growth with licensed locations. Shake Shack also predicts licensed growth, with 15-20 such locations in 2021 and 20-25 in 2022. But licensed stores do not drive revenue growth the way company-owned stores do. business. With licensed locations, Shake Shack reports license fees as income rather than restaurant sales, but sales volume is the largest number.
Why it might not be a buy right now, however
Armed with cash and ready for robust growth, Shake Shack is well positioned for the future. In addition, restaurant sales are improving. Suburban Shake Shack locations had already returned to growth earlier in 2021. And regions like the Southeastern United States are approaching a full recovery in sales volume. One would expect this to continue throughout the year, as coronavirus vaccines continue to be distributed.
But much of Shake Shack’s future growth has already been factored into the action, as the graph below suggests.
Shake Shack shares have never traded at a higher price / sell ratio than they do today. Based on this, I could see the stock retreating or trading sideways until the company’s earnings had a chance to catch up. It’s hard to imagine another catalyst driving equities higher in the short to medium term.
Zoom out further
I believe that long term investing, buying and holding is the best strategy. For the Shake Shack share, I expect a better chance of positive returns the longer you hold. This is because the company’s earnings situation is only expected to improve over time. Certain expenses like general and administrative expenses have increased over the years and are expected to continue to increase with a larger restaurant base.
When Shake Shack went public, it was targeting 450 sites owned by American companies. Management no longer regularly talks about long-term goals, but it’s safe to assume that the cap for this mark is somewhere in this stage. Therefore, her current growth plans will bring her much closer to a mature business than a trendy newcomer.
As it matures and business expenses increase, Shake Shack could focus on profitability and capital allocation. It won’t happen overnight. But this whole process could generate positive returns for shareholders starting today. Having said that, I am not sure it will be enough to beat the market.
The bottom line: Shake Shack is a strong brand with big plans. But the stock is expensive right now. Historically for this company, a price / sales ratio of 3 has been an opportunistic entry point. For now, you can expect a better entry. But if you buy today, be prepared to take a long time to increase your chances of making money on your investment.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.