JPMorgan Cuts Shake Shack Outlook, Sees 15% Downside

JPMorgan’s John Ivankoe maintained a Neutral rating on Shake Shack Inc SHAK, while lowering the price target from $50 to $35.

The company reported strong 4Q15 results, with comps beating the estimate. Shake Shack’s sales, revenue and adjusted EBITDA beat the estimates, partially offset by higher than estimated adjusted G&A.

Following these beat results, the FY16 revenue estimates has been raised from $240.7 million to $243.6 million, while the adjusted EBITDA estimate has been lowered from $46.7 million to 45.7 million.

The EPS estimate for FY16 has been lowered from $0.39 to $0.35, “with further upside constrained by 100-150bp labor costs for SHAK to pay higher market-based wage rates and a tax rate of 43-44 percent,” Ivankoe mentioned.

Model Changes

Ivankoe explained that the 2020 model was based on the assumption of a “realistic” case for 2020, with the domestic company store AUVs estimated at $4.3 million, store margins at 27 percent and G&A of 8.5 percent of revenue, leading to EPS of $1.10.

“We characterize our 2020 assumptions as “realistic” with the company still achieving 25-30+ percent EPS growth in the out years,” the analyst stated.

According to the JPMorgan report, “The reality is the shares still don’t give us the risk-adjusted upside to recommend. Instead, a sub-$30 level would be a more interesting entry point – a level that was in fact very briefly reached on January 14th.”