Iconic Burger Chain's Stock Rallies, Defying Market Trends

Key Points

• Shares of Shake Shack are rallying by over 16% in a single day after releasing quarterly earnings results. 
• The reaction comes after the company showcased double-digit growth across all of the drivers that matter. 
• Wall Street analysts still see an additional double-digit upside ahead. 

The broader stock market is causing investors a little pain to start the month of August, as the S&P 500 is declining by as much as 0.75%. The NASDAQ is lowering by over 1%, despite the Federal Reserve (the Fed) announcing that an interest rate cut is on the table for September 2024 and the CME’s FedWatch tool pricing in an over 90% probability of this happening; markets are selling off.

Is there a reason for this selloff? The July ISM Manufacturing PMI index just delivered a 21-month streak of contraction, with July’s reading of 46.8% being the lowest in the year. This is awakening some worries for investors who typically lean on the fundamental aspects of the market, as stock prices are historically tied to the PMI index readings. But one stock seems to be immune to all of this.

Shares of Shake Shack Inc. NYSE: SHAK are rallying by over 17% after reporting its latest quarterly earnings results. Being part of the consumer discretionary sector would have placed it at the bottom of the expectation pile, particularly considering that consumers today are kept at bay by inflation pressures. However, that is also why Shake Shack can outperform – and likely will continue to -.

Strong Financial Momentum Drives Rally for Shake Shack Stock

Starting with the top line (revenue), investors will notice that Shake Shack's quarterly press release noted a sales jump of over 16% over the past 12 months. Reaching $316.5 million in sales and operating at a 22% restaurant-level profit margin, up from 21% last year, allows management to better time costs and investments.

This environment, allowing for more efficiency, drove Shake Shack's operating income up to $10.8 million, up from $4.7 million 12 months ago. These trends are starting to fit the profile of a stock that rallies over 16% in a single day, but there's more to it.

Shake Shack understands that its brand is only getting started, but so far, it has received lots of adoption and attention from its audience. This fact can be quantified by a gross margin of 37%, which is impressive by any industry standards.

So, management deemed it fit to expand into new markets like Canada, China, Korea, Mexico, Thailand, and several airport locations worldwide. This expansion will create what economists call "Economies of scale," which means spreading costs across more locations and offsetting most by the additional revenue.

Knowing that growth is present and healthy across Shake Shack's business, investors shouldn't be surprised by learning that earnings per share (EPS) jumped by 33% over the year to reach $0.24. This made Wall Street analysts feel comfortable pushing their forecast for an additional 40% EPS growth in the next 12 months.

Shake Shack Stock Still Has Upside Potential Despite Recent Rally

Truist Financial and TD Cowen Analysts decided that Shake Shack stock is worth more than its current value. Both banks' valuation of $125 for Shake Shack directly calls for a 21.8% additional upside from its current value.

As this price target also means coming really close to making a new all-time high, investors need to understand whether these expectations are realistic or just too out of reach. To do this, they must decrypt the market's message around Shake Shack stock, particularly around valuation multiples.

On a price-to-earnings (P/E) ratio, Shake Shack becomes a clear positive outlier, trading at 190.6x to be significantly above the retail sector's average valuation of 19.5x today. There are always good reasons for markets to bid a stock to higher valuation multiples and near new high prices. Shake Shack gave markets a lot of evidence to do so.

Another technical factor in Shake Shack stock that could encourage the stock price to reach new highs is found on the bearish side. Shake Shack's short interest has risen by 10.5% over the past month, perhaps driven by short sellers expecting the company to deliver lower earnings due to a suffering consumer.

But, unlike its competitor, BurgerFi International Inc. NASDAQ: BFI, Shake Shack doesn't sell the gourmet version of burgers (which are more expensive). Keeping the ticket price growth reasonable, despite higher inflation, has helped Shake Shack earn—and retain—an audience like Wendy's Co. NASDAQ: WEN has over the years.