Banks Were Right in Boosting Shake Shack Stock Before Earnings

Key Points

• Shares of Shake Shack rose by 3.8% after the company's first-quarter earnings, beating an inflation-choked economy during the year.
• Double-digit EPS growth projections align with the company's new profitable path, and margins suggest the stock could have an even higher ceiling. 
• Markets and analysts bid up the stock, comfortable knowing that the brand may keep beating expectations.

After announcing results for the first quarter of 2024, arguably the most essential release of the year as it sets the tone for any stock, shares of Shake Shack Inc. NYSE: SHAK moved higher by as much as 3.8% in the first hours of the trading session. Investors have much to digest in the company’s release, though one trend remains steady. 

Those on Wall Street saw it fit to boost the stock’s valuations before the earnings announcement. Markets as a whole felt comfortable bidding up the company’s valuations as well as the stock’s price action relative to peers.

However, as part of the consumer discretionary sector, investors wonder if Shake Shack still has some fuel left in the tank to deliver double-digit growth this year despite the United States seeing an inflation-choked consumer base across the board. 

Shake Shack’s Value Proposition Beat Inflation Concerns

According to financial stocks' quarterly results, the U.S. consumer still suffers from stubbornly high inflation rates. Bank of America Co.'s NYSE: BAC earnings show rising credit card delinquencies and deteriorating FICO scores. 

Subsequently, readings of U.S. consumer sentiment declined to their lowest levels since 2022 despite reaching a three-year high recently. While this may be bad news in the short term, it also gives the Federal Reserve (the Fed) another angle to consider in its path to potential interest rate cuts to bail out the consumer. Consumer discretionary stocks like Netflix Inc. NASDAQ: NFLX plummeted by as much as 20% following its first-quarter results, pointing to weakening demand for the year due to tighter consumer budgets. 

Shake Shack's motto is delivering the best ingredients and quality at an affordable price tag. This enables the consumer to still have a dine-out experience without breaking the bank. For this reason, the company's market capitalization has risen above that of its closest competitor. A $4.6 billion market cap places Shake Shack above BurgerFi International Inc. NASDAQ: BFI and its $10.6 million size. Shake Shack’s size is only the beginning as a proxy for market sentiment. 

A Stellar Start to The Year

In the company’s press release, investors can find reasons behind Wall Street’s preference for Shake Shack stock. A net revenue increase of 14.7% over the year beats expectations during a tight inflation year. But wait, there’s more. 

A net profit of $2.2 million blows the $1.6 million net loss in the previous year, giving investors and analysts hope for sustained and growing brand profitability. Seeing that the company opened six total new locations during the quarter, growth could be attached to Shake Shack in more ways than one. 

Analysts believe earnings per share (EPS) could jump by as much as 40.9% this year, compared to the restaurant industry’s average expected growth of 16%. The company’s financials can make this bold prediction more of a reality. Shake Shack's gross margin in the past 12 months was 36.6%, which is on par with Wendy's Co.'s NASDAQ: WEN 35.6% gross margin. 

These high margins can only be achieved through pricing power and brand loyalty, features that come to life in Shake Shack’s operating cash flow (a proxy for net income). Last year, the company recorded $19.8 million in cash flow, which nearly doubled to $30.6 million this quarter, attracting the market’s attention. 

Standing At the Top of The Group

Analysts at Truist Financial Co. saw enough evidence to boost Shake Shack’s price targets up to $115 a share, calling for a 9% upside from where the stock trades today. Although these ratings are a positive sign for the stock, bullish signs don’t stop there. Now trading at 96% of its 52-week high, the stock could be flirting with an attempt to make new all-time highs soon. Through this rally, markets sent investors a few key signals. 

Because Shake Shack’s EPS growth is set to beat the rest of the retail sector, markets feel comfortable paying a premium. A P/E ratio of 229.6x, 889% above the sector’s 23.2x valuation today, can only be justified by above-average growth rates. 

When compared to other valuation methods, such as the price-to-book (P/B) ratio, Shake Shack still leads. A multiple of 9.5x goes above the sector’s 4.9x valuation by 94%. After issuing strong 2024 guidance in its shareholder letter, the company is giving investors even more reasons to add this one to their watchlists.