Since Shake Shack (SHAK 0.32%) went public in 2015, it's been on my watch list. I like the company's brand recognition, average unit volumes (AUV), and opportunity for expansion. But I've never added shares to my portfolio; there's always been just enough to keep me on the sidelines. And I'm glad for that. It's underperformed the market average since its IPO.
When the stock market crashed earlier in 2020, most of my watch list stocks got a lot cheaper. This included Shake Shack, which tanked to all-time lows. However, I ultimately pulled the trigger on a different stock on my watch list: plant-based meat company Beyond Meat (BYND 5.96%). Its stock price fell, even though its business is thriving. That's why I believed it was the better buy. But now that the stock has climbed higher, is it still the smarter pick right now?
Beyond Meat's expansion
Beyond Meat raised guidance each quarter in 2019, and still wound up beating guidance with full-year results. That's because the company only guides based on the deals it has -- it doesn't issue guidance based on deals yet to come to fruition. Closing 2019, CEO Ethan Brown said new deals were in the works, including a goal to enter China in 2020.
Brown was right; there's been a constant flow of new deals for Beyond Meat in 2020. In just the last three months it partnered with Starbucks to enter China, launched menu items with Yum China, gained greater distribution in China with Sinodis, and grew its European operations with a new production facility. This growth stock didn't slow down at all during the pandemic, even as world economies did.
At one point during the market crash, shares of Beyond Meat traded below $60 per share. That was lower than where the stock was at the close of its first day of trading. Given the company's track record of beating expectations, and the continued growth opportunity, I bought Beyond Meat stock.
Shake Shack's struggles
Shake Shack is a trendy better-burger chain with attractive AUV -- the annual sales processed at a single location. In 2019, company-owned locations in the U.S. had AUV of $4.1 million. This high sales volume primarily comes from dine-in traffic; the company doesn't operate a single drive-thru. When the COVID-19 pandemic closed dining rooms around the world, Shake Shack felt the impact more than most fast-food burger joints.
At one point, Shake Shack sales were down 73% year over year. The company quickly moved to salvage sales by adding new delivery partners, and even launched at-home burger kits. But it's still losing tons of money. In the first quarter earnings call, management said it was burning through $800,000 per week.
Shake Shack's management chose to prepare for a prolonged coronavirus situation. Considering its cash burn rate, it was a responsible decision. It prepared by issuing 3.4 million new shares of common stock, raising $136 million in gross proceeds. But it came at the cost of 10% dilution to shareholder value.
The better buy today?
This doesn't mean there's nothing to like about a Shake Shack investment today. According to the company's CFO, the most cash and marketable securities it ever previously had on the balance sheet was $92 million in the second quarter of 2018. As of the beginning of May, it had $247 million. So right now, it's flush with cash.
Some of that capital will be used up by Shake Shack's ongoing cash burn. But as the restaurant business rebounds, that cash burn will mitigate and leave plenty of cash leftover. New restaurant development is on pause right now, but when the company returns attention to growth, it will be in a strong financial position to do so.
Not only that -- this coronavirus crisis gave Shake Shack management some perspective. It's rethinking its entire restaurant design going forward, to enable higher off-premise (to-go, delivery) sales volume. Eliminating reliance on dine-in restaurant traffic is a good thing long term.
So there may be future reward with Shake Shack, and it's also true Beyond Meat has risk. Consider its valuation. Each new deal over the last few months pushed its stock higher -- shares have more than doubled from March lows. It now trades at a staggering 25 times trailing sales. Granted, sales are growing. But there's no way to quantify what these new deals will add to the top line. The stock's rise may not be proportional to the business it's gained.
At Beyond Meat's high valuation, any slip-up could send shares back to a more reasonable price. Then again, Shake Shack stock isn't considered cheap either, at over 100 times earnings.
If I had to chose today, I'd still say Beyond Meat was the better stock to buy. Its business is showing no signs of slowing down.