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Potential Shake Shack IPO: Is It a Good Buy?

By Jeremy Bowman - Oct 10, 2014 at 10:00AM

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It's still early, but there's a lot to like about the burger chain's prospects on the public markets.

There's been no shortage of IPO activity in the restaurant industry this year. El Pollo LocoZoe's Kitchen, and Papa Murphy's all debuted on the public markets earlier this year, but rumors of a Shake Shack public offering could be the golden ticket in the restaurant industry this year.

In August, Reuters broke the news that the restaurant group was interviewing investment banks to prepare for a public offering that could value the burger chain at $1 billion. Since then, other news outlets have reported the company has selected JPMorgan Chase and Morgan Stanley to manage the sale. Shake Shack has not yet confirmed their intention to go public, and has made no comment on the matter.

Shake Shack's most recent opening in Atlanta. Source: Shake Shack Facebook page

The decision to go public seems unsurprising given the company's recent expansion. In 2012, Union Square Hospitality Group, the parent company of Shake Shack sold 39.5% to the investment firm Leonard Green & Partners, which helped fuel its growth over the last few years. Despite the fanfare that's followed Shake Shack since its inception, the company only has 56 locations today. Let's take a closer look at Shake Shack's roots:

Humble origins
The burger chain began life as a hot dog cart in New York's Madison Square Park, part of a city project to revitalize the park. The cart's popularity led to an upgrade to a kiosk, and long lines became the norm as word spread about the tasty burgers, fries, and shakes. From there, Shake Shack opened several locations around New York, and in 2010 opened its first restaurant outside of New York, in Miami. International expansion followed the year after in Dubai, and since then the company has added outposts in distant locations such as London, Istanbul, and Moscow.

Top-notch management
Led by Danny Meyer's Union Square Hospitality Group, Shake Shack isn't your average burger stand. Meyer is one of the most well-respected restaurateurs working today, and was even called the "greatest restaurateur Manhattan's ever seen" by the New York Times. His restaurants have won 25 James Beard awards, and his flagship location, Union Square Cafe, was ranked New York's most popular restaurant nine times. Meyer has made hospitality a staple of his business, and brings a fine dining pedigree to fast casual, part of what makes Shake Shack stand out in a crowded field. 

What about the numbers?
Shake Shack hasn't yet confirmed its intention to go public so speculation about an offer price or any other details remains just speculation at this point. But if the reports are accurate, Shake Shack could be among the more affordable restaurants stocks to hit the public markets this year. The company is expected to deliver $20 million in earnings, not too shabby for a chain with just 56 locations. Based on those figures, the average Shake Shack brings in about $350,000 in profit a year, well ahead of Chipotle Mexican Grill, generally considered the leader in the fast casual industry, which makes an annual profit of just over $200,000 on average from its restaurants.

Shake Shack has not only benefited from the incredible buzz the first locations generated, but also from prime real estate locations in places like baseball stadiums, airports, and high-traffic intersections. The company's well-regarded brand and reputation has helped open the doors for high profile locations like Grand Central Terminal, but expansion may make it difficult for it to continue to find such choice properties. Even if the company can't maintain that level of profitability going forward, those figures are a testament to its popularity and the success of its business model.

Should you pull the trigger?  
With expected earnings of $20 million this year and a valuation of $1 billion, the burger chain would be initially valued a P/E of just 50, relatively modest for an IPO with huge potential. For comparison, high-flying Chipotle trades at a P/E of 60 as its growth prospects remain as bright as they were during its IPO eight years ago. Meanwhile, newer fast casual stocks like Zoe's Kitchen and El Pollo Loco trade at forward valuations above 50, making Shake Shack's current pricing look very appealing.

With only 56 locations worldwide, there is enormous room for growth for the chain if management desires. Chipotle has expanded to 1,700 outlets, and continues to grow by 10% or more every year. It may be too early to extrapolate Shake Shack's future, but it certainly seems that the demand is there to meet a Chipotle-like expansion. 

Investors will officially hear from the company when it releases its S-1 registration statement, an SEC-mandated filing for going public. In the report, Shake Shack will explain how it intends to spend the proceeds from the IPO as well as provide expected growth figures and other details about its business, which will help shed light on the stock's potential for investors. If the current valuation holds up, I would certainly consider Shake Shack a buy, but a lot can change between now and the offer date.

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Stocks Mentioned

JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$115.82 (-0.48%) $0.56
Morgan Stanley Stock Quote
Morgan Stanley
MS
$78.16 (0.93%) $0.72
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,288.87 (-3.22%) $-42.84
Zoe's Kitchen, Inc. Stock Quote
Zoe's Kitchen, Inc.
ZOES
El Pollo Loco Holdings, Inc. Stock Quote
El Pollo Loco Holdings, Inc.
LOCO
$9.76 (-4.22%) $0.43
Papa Murphy's Holdings, Inc. Stock Quote
Papa Murphy's Holdings, Inc.
FRSH

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