Is It Time To Buy Shake Shack (NYSE:SHAK)?

The Rebound In Fast-Food Is On

The fast-food industry was not immune from the pandemic and those without a drive-through presence were hit the hardest. Growth chains like Chipotle Mexican Grill (NYSE:CMG) and Shake Shack (NYSE:SHAK) saw their revenue fall by high double-digits but the rebound is already on. In both cases, a focus on digital operations has not only helped drive revenue but it is having a positive impact on margins and improving profitability.

Shake Shack reported a near 18% decline in revenue for the calendar 3rd quarter which is not good news. The good news is that the revenue decline is about half what it was in the calendar 2nd and much better than the analysts had hoped for. The reason for the relative strength is eCommerce. Sales via eCommerce increased more than 300% to account for 60% of sales and are expected to continue growing in the coming quarters.

The next report is due out in the first weeks of February and should show another sequential improvement and a return to YOY growth. The $154.1 million expected by the analyst would be a gain of 1.75% from the prior year and this estimate is likely too low. The analysts have, in general, been hesitant with upping their forecasts for the 4th quarter and that is particularly true of the restaurant stocks

Shake Shack Is Still Growing

Not only is the company expected to return to profitability in the coming quarter but growth, on a forward basis, will be underpinned by the company’s expansion. As of the last report the company had returned to its full expansion schedule and is expecting to end the year with 20 new company-owned stores. Looking forward, the company is expecting to open 35 to 40 stores in 2021 and incorporate new features in each.

Among the new features will be the company’s first drive-through experience as well as Shack Track (eCommerce) and the potential for ghost kitchens. The ghost kitchen concept is already being used by franchisees in the UK. It utilizes spare capacity at off-premise locations to bolster capacity in high-demand markets.

Analysts at Cowen recently called the stock out as an opportunity for 2021 citing the ghost kitchen concept among other drivers for the stock. According to them, there are three factors that will help drive gains at Shake Shack in 2021. The first is ghost kitchens, the second is the digital transformation, and the third is pricing power. Shake Shack has refrained from rising prices in the eCommerce channels which presents not one but two drivers for the business. Not only does it offer a better value versus competitors who tack on an extra 12% to 15% but small incremental increases can provide a lever for earnings.

The Analysts Are Still On The Fence

The analysts are generally on the fence when it comes to Shake Shack but that is an opportunity in the making. The company’s performance in the current and coming quarter should get the sentiment changing for the better and that will be good for share prices. As of now, the consensus target is well below the current price action.

On a technical basis, it looks like Shake Shack could be setting up for a buying opportunity. The stock recently hit its post-correction high and has since pulled back to support. Support is at the short-term moving average and a previous point of resistance where a strong bounce can be expected. If support confirms at this level a period of sideways trading will likely be followed y new highs above the $90 level. If the short-term EMA fails to hold price action up a move to $80 and $75 is possible.