The Wall Street Note Killing Shake Shack Shares

In a report published Tuesday, Stifel analysts downgraded the rating on Shake Shack Inc SHAK from Buy to Hold, with a fair value of $55, based on valuation. The analysts commented, "…we remain confident in our unchanged bullish view on the two fundamental parts of the SHAK story within our Stifel Investment Framework, including: (1) The SHAK Company Story: as a top "how company" within today's "how economy"; and (2) The SHAK Concept Story: as the industry's best "fine-casual" positioning." In the socially-networked world of today, the way in which a company operates is a more significant determinant to its long-term success than what the company produces. The analysts believe that Shake Shack's most valuable asset is its "Enlightened Hospitality" approach to the restaurant business. "Perhaps counter intuitively, by out-behaving its competition, SHAK ultimately ends up caring for its investors by delivering a lifestyle brand with privileged access to customers, to employees, to real-estate sites, and to suppliers around the world," the Stifel report mentioned. The analysts believe that the company's business model represents "the industry's newest and best positioning (coined "Fine-Casual") – which are a new breed of quick-casual restaurants that we expect will come to dominate the US restaurant industry over the next thirty years – whose concept elements ("inputs") are much more like a Quick Service Restaurant (QSR) – with a single product-line focus, paper plates, and even a drive through in some cases – yet are able to deliver the "Big-Three Outputs" that are absolutely required for any restaurant brand within any segment to achieve a structural competitive advantage: which are high sales mixes of "dinner, dine-in, and female-guests."" "…given the recent price appreciation of SHAK shares, we reduce our rating to Hold from Buy based on valuation alone," the report added.