Morgan Stanley Asks: How Does Shake Shack Stack Up?

In a report published Tuesday, Morgan Stanley analyst John Glass initiated coverage of Shake Shack Inc SHAK with an Equal-weight rating and $38 price target.

According to Glass, the fundamental debate investors should focus on include:

• 1. Can Shake Shack's average unit volume (AUV) remain high or is margin a key driver? The analyst stated that it will take "investor education" to understand the forces limiting AUV growth but noted that the company's story "works" even as AUV's shrink.
• 2. Can the unit economics of the business be improved? The analyst answered that the answer is a "clear yes" if management chooses to make this a key focus.
• 3. How many "Shacks" can exist? The analyst explained that management's goal of 450 units is a valid objective while the company has an "unusual" international opportunity given early success in eight countries.
• 4. How does Shake Shack compare to the multitude of other burger restaurants? The analyst noted that the company has a "unique" positioning in the market with "high culinary and hospitality standards" that sets it apart from its competitors.

Bottom line, a $38 price target is between a $50 "bull case" and $25 "bear case" scenario. The analyst concluded by stating that "the dynamics of a small float are at work and we expect Shake Shack's large, open-ended market opportunity to sustain valuation versus many other recent restaurant IPO's."