Shares of Shake Shack (NYSE:SHAK) ran hot and cold last week. The burger flipper's stock initially moved higher after posting blowout quarterly results, but a secondary offering resulted in selling pressure that was too much for the chain to overcome.
The quarterly report itself was encouraging. Total revenue soared by 75% since the prior year, fueled by brisk expansion and a head-turning 12.9% spike in comps. That's a lot of flat-top hot dogs, crinkle-cut fries, and frozen-custard concretes getting served up. Adjusted earnings tripled to $0.09 a share, more than three times the $0.03 a share that Wall Street was expecting. It's the third quarter in a row in its brief tenure as a publicly traded company that Shake Shack has blasted through analyst profit targets.
Shake Shack also boosted its revenue and comps guidance for all of 2015. It also expects to open a dozen new burger joints this year, up from its earlier goal of 10 new Shake Shack locations. That may not seem like a lot, but opening 12 new units is a pretty big step for a company that only had 63 Shake Shacks open worldwide when the year began.
But just a few minutes after posting blowout financial results, Shake Shack issues a press release detailing a secondary offering where pre-IPO investors would be selling at least 4 million shares. The offering itself isn't dilutive. Shake Shake itself isn't offering new shares. But seeing early investors bail on the stock was enough to silence the chorus of high-fives that followed the report.
Shares of Shack Shack opened sharply higher the next morning, but the boo birds eventually wrestled away those gains with the stock closing lower on the day. Shake Shack stock fell in each of the five trading sessions last week.
I'd like to order a side of fries with that
Things didn't get better when the secondary offering was priced two days later. The shares sold at $60, well below where the stock was when the week began. Shake Shack stock had closed at $70.64 the day the offering was announced and opened north of $75 the next morning on the strong earnings report before negative sentiment grounded the beef.
In retrospect, it would have been less disruptive if the sellers had bailed on the open market. Shake Shack may not generate the kind of daily volume to support 4 million shares getting dumped at one time, but done over time it would have likely resulted in a higher average exit price and a lower weekly hit for the stock.
We can't rewrite history, of course. But investors can now take advantage of a rare sale where a stock takes a big hit during a week that its fundamentals improved dramatically. The strong quarterly report is forcing analysts to raise their forecasts. Wall Street pros that saw Shake Shack earning $0.13 a share this year and $0.16 a share next year when the week began are now perched at $0.24 a share for 2015 and $0.29 a share for 2016. That may still find Shake Shack trading at a grimace-inducing forward earnings multiple in the triple digits, but the lower stock price and higher profit projections find it now perched at the cheaper end of that range. Shake Shack began the week trading at 551 times this year's profit target, and it closed things out at a multiple of 230. That's a sale by Shake Shack's historical standards, and with its prospects improving with every passing quarter it may be too tempting for opportunistic growth investors to pass on here.