Analysts On Shake Shack: How High Is Too High?

Shake Shack Inc SHAK gained more than 5 percent Tuesday as analysts released ratings at the expiration of the so-called quiet period.

The upscale burger chain went public January 30 at $21 a share and changed hands recently at $43.49.

Morgan Stanley and Barclays both launched coverage of Shake Shack with Equal-Weight ratings and price targets of $38 and $40, respectively.

Goldman Sachs and JP Morgan came out with Neutral ratings; Goldman's target is $36 and JP Morgan's is $34.

But Stifel launched coverage with a Buy rating and $50 target.

With a market capitalization of about $1.58 billion, Shake Shack operates 37 restaurants in the U.S. and hopes to increase that number to 450. The company, which traded as high as $52.50 soon after its IPO, operates 27 international units.

Related Link: All About Shake Shack's Hidden Menu: Peanut Butter & Bacon!

Barclay's Jeffrey Bernstein said the company's growth potential may justify an "industry leading valuation" for the stock.

"But the question is how high is too high," Bernstein said. Given its expected annual revenue growth of 30 percent over the next few years, "the shares are fairly valued," in Bernstein's view.

About 40 percent of the company's 2014 sales volume came from seven of its restaurants located in Manhattan, according to Morgan Stanley's John Glass.

Average unit volume is expected to shrink as the company expands its business outside the New York area, but Glass said expanding profit margins will make "the story work."

Glass expects same-store sales growth of between 1 percent and 2 percent over the next several years.

But said stores are "capacity constrained" and a small base for comparison and relatively long lead times for store openings make the same-store growth measure "less meaningful," Glass said.

Stifel's Paul Westra called investing in a small restaurant chain with high ambitions is "an inherently high-risk proposition."

But what Westra described as the company's plan to hire only people "with an innate personality to please," plus what he called Shake Shack's "culture of caring" will lessen the risk for investors.