Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons Why Shake Shack Will Bounce Back in 2016

By Rick Munarriz – Mar 8, 2016 at 9:06AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The fast-growing burger chain hit a bump after its latest quarter, but the future is promising.

Image source: Shake Shack.

The market wasn't exactly impressed with Shake Shack (SHAK -0.78%) after posting fresh financials following Monday's trading close. The stock moved lower, even though it once again surpassed analyst targets with impressive growth on both ends of the income statement. 

Revenue climbed 47% to $51.1 million for the fourth quarter, fueled by brisk expansion and an 11% year-over-year spike in comps. Operating profit margins widened sharply with adjusted EBITDA more than doubling. The "better burger" chain scored a profit of $0.08 a share, reversing from a loss during the prior year's holiday quarter. Wall Street pros were holding out for an adjusted profit of $0.07 a share on 45% top-line growth.

Shake Shack's guidance wasn't as inspiring. It sees growth slowing as 2016 plays out, and its guidance calls for between $237 million and $242 million in revenue. Analysts were already perched just above the midpoint of that range, forecasting $240.7 million on the top line. Shake Shack's outlook translates into revenue growth decelerating to 26% at the midpoint for 2016. It expects to open at least 13 company-owned locations this year, but it's bracing investors for a more pedestrian 2.5% to 3% gain in comps for 2016. 

The ho-hum guidance is holding back the stock that has already surrendered more than half of its value since peaking 10 months ago. However, things can get better for Shake Shack. Let's go over a few reasons to get excited about the stock's prospects for 2016 beyond its post-earnings dip.

1. Shake Shack is still beating analyst profit forecasts
The fast-growing burger chain may have narrowly landed ahead of Wall Street profit targets, but it keeps a welcome streak alive: Shake Shack has beaten analyst earnings estimates in each of its first five quarters as a public company.

Companies that consistently exceed market expectations have a funny way of rewarding investors. That may seem like a flawed mantra for a stock that is trading for less than half of its all-time high, but those highs were the result of unsustainable froth in the months following its 2014 IPO. Using Shake Shack's IPO price of $21 as the starting line, it's not too shabby to see the stock has roughly doubled as of last night's close.

2. Chicken will be a game changer
Shake Shack introduced Chick'n Shack after the quarter ended, and the fried chicken sandwich has earned rave reviews. The company didn't reveal actual sales metrics, but CEO Randy Garutti was on CNBC last night, calling it the chain's most important menu addition since its signature burger. 

Garutti expects the new sandwich to enhance sales and margins, even while conceding that it does take some extra labor to prep. Having a premium chicken sandwich opens up Shake Shack to more than folks that want a beefy burger. It also helps keep the chain from getting vetoed when someone doesn't want a burger or a hot dog. 

3. Shake Shack is in a unique position 
Shares of Shake Shack aren't cheap. You have to go out to next year's profit targets for its earnings multiple to drop into the double digits. Most restaurant chains trade at lower multiples, even if if few are growing as quickly. However, Shake Shack does have a pretty unique negotiation position when it comes to landing the juiciest expansion opportunities.   

"If you're a developer and you've got a mall that's being redone or you've got a site, you probably want a really good burger -- and you're probably talking to us," Garutti said at an investor conference earlier this year. "We are in every one of those conversations right now."

No one is close to Shake Shack in terms of unit volume and arguably brand prestige, making it easy to get great deals on the best locations. The future is bright for Shake Shack, and Monday night's post-earnings stock decline presents an interesting buying opportunity.

Rick Munarriz owns shares of Shake Shack. The Motley Fool has no position in any of the stocks mentioned. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Shake Shack Stock Quote
Shake Shack
$48.91 (-0.78%) $0.39

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.