Source: Wikipedia.

On Tuesday, upscale burger chain Shake Shack filed an amended prospectus for its initial public offering at the end of the month. With an indicated price range of $14 of $16 per share, the company is aiming for a valuation in excess of $500 million. Not bad for a company that only opened a decade ago, with its roots in a New York City hot dog stand! More remarkable still, in that price range, the shares could significantly undervalue Shake Shack's growth potential. As such, investors could witness a large first-day pop when the shares begin trading.

Not everyone appears to agree with that assessment, however, as the following paragraph from a Bloomberg article shows:

Even using that higher figure, Shake Shack is valuing itself at 5 times sales, a premium to its peers. El Pollo Loco Holdings fetches around 2.5 times sales, Noodles & Co. trades at 2 times, and Potbelly Corp. is valued at around 1.2 times its annualized sales figures for 2014, based on the first three quarters of the year.

Fair enough, but I think the best comparable (in terms of positioning and quality, not maturity) for Shake Shack are none of the companies mentioned, but rather it's Chipotle (NYSE:CMG)

On that basis, let's see how Shake Shack stacks up with Chipotle at the time of its January 2006 IPO:


Number of restaurants operated by the company at the time of the public offering

Price / TTM Sales
(based on IPO offering price)*




Shake Shack



*Based on the $15 midrange price for Chipotle. Source: Company documents.

"But Shake Shack shares would sport a price-to-sales multiple more than twice that of Chipotle!" I hear you retort. Absolutely, but allow me to make three points in response to that.

First, Chipotle's price-to-sales multiple of 2.2 is based on the shares' $22 offering price. The stock closed the first day of trading at $44, for a price-to-sales multiple of 4.4.

Second, from that first-day closing price, Chipotle's shares went on to generate enormous returns, multiplying 16 times in value.

Third, while one can argue about the differences in size of addressable market and competition the two companies face, the difference in store count (see table) makes it clear Shake Shack is at a significantly earlier stage in its development than Chipotle was when it first sold shares to the public. That earlier development stage means a longer growth runway ahead. (Naturally, Shake Shack will need to execute to turn potential growth into actual growth, and that's not a given.)

To those who say Shake Shack looks overpriced at five times sales, I say take another look. It's clear from the success of In-N-Out Burger and Five Guys that there is a demand for burger joints that marry convenience and quality. Shake Shack appears to have mastered that formula, and Chipotle provides a precedent for the type of extraordinary returns a well-run, high-quality business of this type can produce.