Shake Shack Valuation Gets Another Reality Check in Light of Decelerating Growth

Vincent Shen: So despite the rough year trading … the stock's still almost doubled from its IPO price. So the valuation, and I know this is where you harp on this sometimes, is high. It trades at about 5.8x expected 2016 sales, based on that guidance, and 97x forward earnings. Sean O’Reilly: I'm sorry, what was that? 97? I plugged my ears but I still hear that. Shen: It's just shy of triple digits, which enjoyed for pretty much all of 2015. It's high, I cannot deny that. O’Reilly: I hope our audience heard my sigh there. Shen: So keep in mind, that's a hefty premium to most other restaurants and that includes the full spectrum ... like the traditional leaders, like McDonald's to the newer generation of like Chipotle, Chuy's Holdings. That's a premium to all of those guys. O’Reilly: With burgers. Shen: As you can imagine, at those levels, investors ... that's driven by really high growth. Either top or bottom line or both. And for them to have this outlook for 2016, things slowing down, it doesn't surprise me that the stocks trading down and that investors should be concerned or thinking about where that valuation comes into play, or where it comes back in to more reasonable levels. I think another really bearish signal for investors was, during 4th quarter last year, even continuing through the first few months of 2016, a lot of insider selling. It seems like a lot of these bigger shareholders, kind of, they know where the stock potentially is going, and they're cashing out now. It's definitely concern. On a positive note, I will say that the company's in a pretty strong position to invest in their global growth plans for new restaurants. They've said there's 84 stores currently, they had previously stated a goal of about 450 restaurants [crosstalk] for the system. Their cash balance jumped from less than $3 million to over $70 million last year. Definitely lots of money to put into these new locations. O’Reilly: I wonder how much of that came from the IPO proceeds. Kind of, sort of, maybe? My big complaint -- I wonder when did I write that article -- google “Motley Fool Sean O’Reilly Shake Shack” if you want, listeners. My big thing, as our listeners may or may not be aware, I have very simple food tastes. I have a very Midwestern palate. Vince I'm sure can ... Shen: I give Sean a lot of grief because he, sometimes, I think, eats things a little too plain. You got to adventure out a little more. O’Reilly: There's nothing I love more than cheeseburger and fries. I consider myself a cheeseburgers and fries connoisseur. Shen: And do you enjoy a Shake Shack burger and fries? O’Reilly: This is just it, shakes, amazing! Burgers, awesome! Fries, great. It's a little pricey, but it's fine. You're probably getting what you pay for. My thing is, there is no food that is more commoditized in the United States of America, than burgers and fries. I can go get a burger and fries, I don't know, we can go to the Italian Deli, we can go to the Trademark bar up the road, we could go, I think of probably five places I can get a burger and fries within five minutes. Shen: You're absolutely right. O’Reilly: The competitive advantage that Shake Shack offers is vastly [similar to] like a Chipotle. They seem to got the fast casual Mexican thing going on... Shen: Shake Shack has its brand power right now and the fact that it's very very popular. Its new location openings are known to have lines out the door and down the block. When you have that kind of consumer diner following it definitely helps in contributing to, I'm sure, a lot of the hype with the stock price hitting $90+ last year. There's definitely no discounting the fact that they are king of the heap right now in terms of burger world, but enough to justify where they're trading at. O’Reilly: Do you think that like an L.A. location, which I'm glad they're doing that, cause that's obviously a natural jump, but do you think an L.A. location can get anywhere close to the revenues of their original location in Central Park? Because I understand that one's like … Shen: That’s tough to call, because hat has such a sordid history. O’Reilly: It was literally a shack in Central Park. Shen: It started as like a hot dog cart. O’Reilly: Yeah Shen: When I lived in New York, everyone talked about a Shake Shack and this was before the IPO. It was this New York place, this very New York centric ... it had that feel to it. It was very very popular. They've been able to, I think, replicate a lot of that worldwide.