Valuation of the Week #4: Shake Shack
As you are undoubtedly aware, Shake Shack made a splash with its IPO a few weeks ago, when it opened at $50/share, well above its offering price of $21. Before you start looking at the number, you should start by sampling the company's products at Madison Park (but be prepared to wait in line). The company's story is told at this link:
Once you have the story, you should read the prospectus filed by the company. It is instructive in the detail it provides on how the founders are tilting the scales in their favor. For a laugh, read the risk section, where the company lists everything that can go wrong:
The next story is about the pricing of the IPO at $21/share, with some perceiving that as too high a number:
On the opening day, the market proved them all wrong by popping up more than 100%:
Before you start entering numbers into your valuation of the company, get a measure of the landscape by downloading the data on all publicly traded restaurants in the United States. Get a measure of what the big players generate as revenues and what they earn as margins. The dataset also lists the number of restaurants that each company has and you can compare it to the 63 that Shake Shack has open.
The dataset also has multiples computed (PE, PBV, EV/Sales etc.) and I have also computed the enterprise value per restaurant, for what it is worth.
Now, you can try the spreadsheet to value Shake Shack. I have the basic numbers already entered into the spreadsheet. The numbers that you can try tweaking are revenue growth rates and operating margins. As you play with the revenue growth, check your revenues in year 10 and compare them to the revenues of other restaurants. In other words, are you shooting for Starbucks, Chipotle or The Cheesecake Factory)? (I shot for Ruby Tuesday..) I already have given Shake Shack the operating margin of the 75th percentile of restaurants but you are welcome to shoot even higher.
When you are done with your valuation, please go into the shared Google spreadsheet and enter your numbers.