It's tough to get away from the restaurant theme that has been the focus of several of my recent columns -- simply because it is a fascinating sector, right now. There's a great deal to write about. Brian Sozzi's interesting piece, Tuesday, on Shake Shack (SHAK) did justice to what has become one of the sector's latest phenomena.
The waiting lines to get a burger and some fries are legendary. Who would have thought that in 2015, another burger purveyor would generate such interest? Burgers are nothing new; they've been served in this country for 100 years or more (White Castle opened in 1921).
The point is that if you serve a good, fresh burger, customers will line up; just as they still do at the In-N-Out Burger in Pasadena, where I've witnessed lines of cars waiting an hour for drive-through service. That chain has been around since 1948, and it's one (Chick Fil-A is another) that I'd love to see be valued in the public markets.
A deeper look at Shake Shack, however, has me perplexed. The company's current enterprise value (market value of equity plus debt minus cash) is about $1.4 billion. and there are currently 75 locations -- 41 company-owned stores and 34 licensed. That works out to $18.7 million per location on an EV/stores basis. It also assumes that licensed stores are worth the same as company-owned facilities. Even if you add in the 10 new stores the company may open in 2016, and leave the enterprise value unchanged, that still works out to $16.5 million per store.
That seems dramatically out of whack, especially when you run similar EV/store calculations for Panera (PNRA) at $2.6 million, Buffalo WildWings (BWLD) at $2.7 million, Chipotle (CMG) at $7.6 million, and another newcomer Zoe's Kitchen (ZOES) at $3.3 million. Cracker Barrel (CBRL), at $5.2 million, is not in the same league in terms of growth prospects as Shake Shack, or any of the others listed above. But it owns much of its real estate.
Finally, if you look at a downtrodden restaurant name such as Ruby Tuesday (RT), they are currently at just $600,000 per store. And that includes a lot of owned real estate (land and buildings for 303 stores, building only for another 257).
Shake Shack is no doubt putting up some great numbers. Revenue was up 67% last quarter, and the profit margins are very strong. I also don't doubt that there's a lot of store growth ahead, well beyond 2016. This company has great potential, but the stock is still ahead of the story. That's despite a 57% pullback since May.
SHAK is trading at 100x next year's earnings, and 6x revenue, I understand that those numbers may not be as meaningful for a company in rapid growth. Such valuations, however, leave little room for error and potential headwinds for the company or sector as a whole. You also could not find a more competitive industry.
Shake Shack is another example of a potentially great company and great brand, but not such a great stock. Not at this point, anyway. But then again, I'm a value guy.
