Shake Shack Shares Lower As Wedbush Initiates At Underperform, $30 Target

Shares of Shake Shack Inc SHAK fell more than 2 percent in the Thursday's pre-market hours after Wedbush started coverage of the stock with an Underperform rating and $30 price target, implying a potential downside of 18 percent.

Shake Shack is an operator roadside burger stands. Among others menu items,the joint is known for its burgers, hot dogs, crispy chicken and frozen custard. The company has approximately 84 locations in over 10 countries and about 45 cities.

"With current valuation implying an ultimate opportunity well above our base case scenario and management guidance, we expect continued valuation contraction as near- and medium-term results decrease the likelihood of more optimistic scenarios," analyst Nick Setyan wrote in a note.

Setyan believes same-store-sales growth headwinds may intensify beyond 2016, while cannibalization may exaggerate as the company adds units to new markets.

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"Given very strong new unit openings, we do not expect SHAK to benefit from a multi-year maturation cycle that serves as a tailwind for other growth restaurants," the analyst highlighted.

"We also believe that while driving upside today, the strength of SHAK's current openings may result in a comp drag even entering the comp base in their 25th month vs. the 19th month for most peers," Setyan continued.

The analyst noted that the company targeted 450 domestic unit opportunity at $3 million AUVs, implying a $1.35 billion domestic sales opportunity, is conservative.

However, Setyan said the company's current $1.3 billion market capitalization as "unjustifiable even under much more optimistic growth rate, unit productivity, and domestic and international opportunity assumptions."

Setyan continued that although new units are topping expectations, upside may be less likely in 2017 and beyond.

"While we estimate near-term unit volume upside could contribute $0.03–0.13 in EPS in 2016, we expect less upside as the mix of marquee market entry openings declines and the mix of openings in existing markets increases," Setyan elaborated.

The analyst expects EPS of $0.46 on revenue of $253.2 million for 2016 versus consensus estimate that calls for EPS of $0.44 on revenue of $251.3 million.

At time of writing, Shake Shack was down 1.89 percent on the day at $35.85.