Shake Shack stock moved higher by as much as 7.58% to $34.50 per share today after analysts at William Blair upgraded it. The firm’s analysts believe the fourth quarter was pretty rough on the restaurant industry as a whole, but they like Shake Shack as we move into earnings season, although the chain isn’t expected to report until early March. They also like Starbucks, which is scheduled to report on Thursday.
Soft same store sales in restaurant industry
In a report dated Jan. 19, analyst Sharon Zackfia and her team said they think that same store sales in the restaurant industry were a bit weaker in the fourth quarter compared to the third quarter. However, they think they were fairly similar when looking at two years ago. They said most restaurants faced difficult comparisons and saw a “calendar penalty” as a result of the holiday shifts for Halloween and Christmas.
Despite the problems in the industry (or perhaps as a result of), the William Blair team expects the fourth quarter earnings reporting season to reveal which chains are winners and which are losers. They add that commodity costs are still favorable as dairy, seafood and grains prices declined significantly. In fact, they said trends on a year over year basis have been “firmly in deflationary territory” for almost a year now.
Shake Shack to lead the way
Specifically for Shake Shack, they’re projecting comparable store sales of 8%, which they say should be the highest in their coverage. As a result, they have upgraded the restaurant chain to Outperform, saying that its valuation is “much more palatable” with an EV/ EBITDA of 24 times their 2017 estimate, even though it has the highest valuation among its peers. They add that its premium has narrowed quite a lot compared to its peers and see upside on the back of strong earnings growth.
They expect Shake Shack to post earnings of 9 cents per share, which is ahead of the consensus estimate of 7 cents. They believe favorable weather in New York, its home market with one-third of its comparable base, drove strong comparable store sales there. Their estimate of an 8% increase in same store sales is ahead of the consensus of 7% and management’s implied guidance of between 3% and 6%. Further, they believe growth in the average check size will drive approximately two-thirds of that gain.
