by Ian Harvey
IMPORTANT NOTE: There is no stop-loss or pre-determined sell price recommended – this is left to the discretion of the individual trader.
Wednesday, November 04, 2015
Shake Shack Inc (NYSE:SHAK)
**OPTION TRADE: Buy the SHAK Nov 2015 52.000 call (SHAK151120C00052000) at approximately $1.00. Sell price is left to your own judgment.
Shake Shack Inc (NYSE: SHAK), engaged in owning and operating restaurants, is set to report third-quarter earnings on November 5th. The upstart brainchild of famed restaurateur Danny Meyer has been on a rocky ride since its debut in January, and now trades close to its post-IPO lows.
For a new stock especially, an earnings report can be a catalyst for a stock pop, and shares jumped 11% after its last report when the fast-casual chain blew past estimates, posting earnings of $0.09 per share against estimates of $0.03, while revenues jumped 75%, ahead of expectations as well. The company also raised its full-year guidance. With last quarter's momentum, and with the stock having tumbled since then, it should be primed to bounce back.
Shake Shack has crushed estimates in its first two reports as a public company, and another strong beat is expected when it reports earnings. Analysts seem to be underestimating the power of its brand, which is not only fueling huge comparable growth at home, but has also driven monster sales at its international licensed stores. Though its P/E is in the triple digits now, it has the growth to justify it as earnings per share. With a market cap of just $1.5 billion, it has room to grow into a valuation several times that.
If Shake Shack can deliver the kind of results it did last time, with restaurant-level operating margins around 30%, profits should grow much faster than expected, pushing the stock price higher and bringing the valuation down to a reasonable level.