Shorting Shake Shack No Longer 'A Best Idea'; Wedbush Upgrades Stock

With Shake Shack Inc’s SHAK current stock valuation implies "an ultimate opportunity more in line with even our lowered base case scenario, and expectations increasingly in line with a decelerating comp and new unit volume trajectory,” Wedbush’s Nick Setyan removed the stock from the Best Ideas List.

The analyst upgraded the stock from Underperform to Neutral, while raising the price target from $30 to $33.

Valuation Up

Setyan believes Shake Shack’s valuation is currently more in line with the company’s long-term opportunity.

On the other hand, the analyst no longer is of the view that Shake Shack’s current $1.1 billion enterprise value is unjustifiable due to lower valuation that reflected weaker terminal sales volume expectations, as well as higher annual unit growth rate than earlier estimated.

“Not only does 2017 revenue guidance imply new unit volumes well below recent trends, but also significant pressure from other non-comp stores,” Setyan explained, noting  consensus expectations were now largely in-line with management’s guidance.

Although there is likely to be pressure from the company’s non-comp base, the analyst expects the pressure to be lower than the consensus expectations.

Related Link: Decelerating Comps Take A Bite Out Of Shake Shack's Q4 Results

Comp Expectations

In addition, Setyan pointed out that same-store sales headwinds were now well understood, stating, “Given very strong new unit openings, we do not expect SHAK to benefit from a multi-year maturation cycle.”

The analyst also believes the strength of Shake Shack’s current openings could drive a comp drag even entering the comp base in the 25th month, as compared to the 19th month for most of the company’s peers.

Moreover, Setyan believes cannibalization could intensify as Shake Shack adds units to the markets it has already entered, with 75 percent of the openings in 2017 targeted as infill.

The 2017 comp estimate has been lowered from 3.0 percent to 2.5 percent, largely in line with the guidance and consensus.

The EPS estimates for 2017 and 2018 have also been lowered.