“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, April 23, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy



Option Trade – Shake Shack Inc. (NYSE:SHAK) Calls

Monday, April 23, 2018

** OPTION TRADE: Buy the SHAK JUNE 15 2018 45.000 CALL at approximately $1.50 TO 1.65. Place a pre-determined sell at $3.00.

Also include a protective stop loss of $0.60.

The New York–based fine casual restaurant chain Shake Shack Inc. (NYSE:SHAK), has outperformed the market in 2017 and is valued at a significant premium over peers like Chipotle, McDonald's, and Yum Brands (NYSE: YUM). The "better burger" chain operator is undergoing an expansion program to widen its footprint considerably.

Founded by Danny Meyer as a hot dog stand outside Manhattan’s Madison Square Park in 2001, it has since evolved into the modern version of the old roadside hamburger restaurant.

It features all you’d expect from a burger joint — burgers, chicken, hot dogs, fries, drinks and even alcohol in some locations — but with a heavy focus on health.

The company’s investment in quality food, employees and technology has led to significant growth in recent years. The number of Shacks has increased dramatically, going from 40 at the end of 2013 to 159 at the end of 2017.

The company has grown far beyond the NYC market — which still has 36 Shacks — and is now located in 20 states and D.C., as well as 11 different countries. Out of the 159 stores, 90 are owned by SHAK and operate domestically, ten are domestic and operate under a license agreement and the remaining 59 are foreign.

The explosive growth will continue this year, with SHAK expected to add 32-35 new domestically owned and operated stores from the current base of 90. It will also add another 16-18 licensed stores to its current base of 69. With the new store openings helping to offset expected flat same-store sales, management is projecting a 25% gain in revenues to $444-$448 million for 2018.

Shake Shack, Inc. is expected to report earnings on May 03, 2018 after market close. The report will be for the fiscal Quarter ending Mar 2018. Based on 7 analysts' forecasts, the consensus EPS forecast for the quarter is $0.09. The reported EPS for the same quarter last year was $0.1.

Also, analysts are expecting Shake Shack to post revenue of $449.14 million in 2018, which represents growth of 25.2% from $358.8 million in 2017. The revenue growth is expected to be driven by the addition of new restaurants.

Influencing Factors

Shake Shack reported a minor comparable-store sales decline in 2017, but Shake Shack's base of existing restaurants is tiny compared to its total sales footprint and to the footprint of more established chains. That's mainly a consequence of the fact that management doesn't add a new store to its same-store sales base until 24 months after its launch. As a result, just 43 locations out of its 159 stores in operation were part of its existing store base last year.

Revenue spiked 34% last year as Shake Shack aggressively expanded its footprint, and sales have soared to $359 million from $57 million in 2012, which translates into an impressive 44% compound annual gain over the past five years.

Profitability was 26% of sales last year, down from 27% in 2016; and in 2018, executives warn, will dip to between 24.5% and 25.5% from its peak of 29% in 2015 – but this is still impressive profitability, though.

Analysts and Hedge Funds Opinions

Equities research analysts at SunTrust Banks increased their Q2 2018 earnings per share estimates for shares of Shake Shack in a note issued to investors on Tuesday, April 17th. SunTrust Banks analyst J. Bartlett now expects that the company will earn $0.20 per share for the quarter, up from their prior estimate of $0.19. SunTrust Banks currently has a “Buy” rating and a $54.00 target price on the stock.

Several other equities analysts have recently commented on the company…..

  • Barclays reissued an “equal weight” rating and set a $49.00 price target (up from $36.00) on shares of Shake Shack in a research note on Tuesday, January 16th.
  • TheStreet downgraded shares of Shake Shack from a “c” rating to a “d+” rating in a research note on Friday, March 16th.
  • Wedbush restated a “hold” rating and issued a $38.00 target price on shares of Shake Shack in a report on Friday, February 16th.
  • Finally, ValuEngine upgraded shares of Shake Shack from a “hold” rating to a “buy” rating in a report on Saturday, April 7th.

One analyst has rated the stock with a sell rating, five have given a hold rating, four have assigned a buy rating and two have issued a strong buy rating to the company.

Institutional investors that have recently made a change to their positions in the stock….

  • BlackRock Inc. lifted its stake in shares of Shake Shack by 3.3% in the 4th quarter. BlackRock Inc. now owns 2,429,663 shares of the company’s stock valued at $104,963,000 after purchasing an additional 77,844 shares during the last quarter.
  • OppenheimerFunds Inc. lifted its position in Shake Shack by 39.1% during the 4th quarter. OppenheimerFunds Inc. now owns 1,005,241 shares of the company’s stock worth $43,427,000 after acquiring an additional 282,404 shares during the last quarter.
  • Sylebra HK Co Ltd lifted its position in Shake Shack by 2.6% during the 3rd quarter. Sylebra HK Co Ltd now owns 1,001,849 shares of the company’s stock worth $33,291,000 after acquiring an additional 25,546 shares during the last quarter.

Harvey’s Options Volatility Indicator

Summary

This is a very small company with a $1.6 billion market cap, but it has the potential to be huge. By 2020, management expects to have 200 domestically owned and operated locations and 120 global stores operated under a license agreement, so they essentially want to double their store base from the end of 2017.

The key to this expansion will be continued customer acceptance of the Shake Shack concept, and given the company’s strong track record odds are high that management will meet their 2020 revenue goal of $700 million, which equates to EPS of 80 cents or higher.

The company will be successful thanks to its better quality food and positive dining experiences at lower prices.

Shake Shack has a market cap of $1,587.01, a price-to-earnings ratio of 76.19, a price-to-earnings-growth ratio of 4.22 and a beta of 1.29. Shake Shack has a one year low of $30.12 and a one year high of $47.39.






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