Restaurant goers may be in the sizzling heart of a "better burger" revolution, but it's understandable if investors don't see it that way. Shares of Shake Shack (NYSE:SHAK) and Habit Restaurants (NASDAQ:HABT) are trading 5% and 26% lower, respectively, year to date. The carnage gets worse if we draw the starting line back to when both stocks peaked, shortly after their initial public offerings roughly two years ago. Shake Shack stock is fetching 55% less than last year's springtime high. Habit stock has surrendered 62% of its value since topping off in late 2014.
Set aside the gloomy long-term stock chart, and both concepts are thriving. Shake Shack revenue soared 40% for its latest quarter, with adjusted earnings rising 25%. Brisk expansion has been the key driver to the trendy concept's heady top-line growth. Shake Shack's store count has grown from 75 to 105 over the past year, and 58 of them are company-owned domestic locations.
Habit is growing slower on most fronts. Revenue rose by 23% in its latest quarter, with adjusted earnings growth actually dipping slightly for the period. Its restaurant count has grown from 128 to 160 mostly company-run burger joints.
Customers keep flocking to the two chains. Same-store sales rose 2.9% at Shake Shack. Habit is checking in with a more modest 0.2% uptick, but it's a positive showing at a time when many restaurant operators are going the wrong way. Perhaps more importantly, Habit was able to extend its impressive streak of positive comparable-restaurant sales to a whopping 51 quarters.
The value of a good burger
Shake Shack and Habit have their distinctive treats. Shake Shack's frozen custard concretes and Habit's charbroiled burgers are cult faves. A Consumer Reports reader survey two years ago found Habit topping 20 different rivals -- including regional darlings In-N-Out and Five Guys -- for the best-tasting burger. Shake Shack is proving its worth at the register. The roughly $3.5 million average in annual sales being rung up by its domestic locations tops sales at all burger chains, even McDonald's, which has the benefit of drive-thru windows and brisk breakfast business. Habit's average of $1.9 million falls behind Shake Shack and Mickey D's, but it does top many of its larger peers, including Burger King and Five Guys.
If Shake Shack and Habit are so great, why have their stocks been such lousy investments? The easy answer is that valuation is the culprit. Shake Shack and Habit went public when the "better burger" craze was making investors' mouths water, and the stocks were bid up in the process.
Neither stock is exactly cheap at the moment, even with the passing ships of improving fundamentals and shrinking share prices playing out. Habit is trading at 55 times next year's projected earnings. Shake Shack's multiple for 2017 checks in at 68. Bulls will argue that it's not entirely fair to peg valuations on the two chains' earnings multiples at a time when both are investing heavily in growing their footprints of company-owned locations. Both operators have some legitimate advantages that set them apart from the crowded field, and those distinctions are worthy of market premiums.
With so much expansion room left for both concepts, we're merely in the early stages of the "better-burger" revolution, but which is the "better" buy? I own both stocks, personally, but I don't mind playing favorites. I recently chose to add to my Habit position. Shake Shack is the glitzier name, but it's not a surprise to see average unit volumes shrink as the concept expands outside of its high-traffic New York stronghold. Habit has been the steadier performer as it broadens its reach across the country.
There's also a big difference in terms of market valuation. Habit and Shake Shack are generating roughly the same revenue (Habit's in the lead on a trailing basis, but Shake Shack should edge it out in the year ahead), but Shake Shack's market cap is more than double what Habit is commanding. Between offering more downside protection if there's another market correction or better bang for a potential acquirer's buck, I'm giving Habit the nod as the better investment at today's levels.
Rick Munarriz owns shares of Habit Restaurants and Shake Shack. The Motley Fool is short Shake Shack. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.