MorningWord 2/23/15: Love $SHAK, That’s Where It’s At

by Dan February 23, 2015 9:49 am • Commentary

It’s been an odd couple months for fast/quick serve restaurant stocks. Consumers appears to be increasingly choosy  when it comes to their burgers, burritos, pizza, chicken and noodles.  While some stocks like Jack in the Box (JACK) , Red Robin (RRGB), Domino’s Pizza (DPZ) & Wendy’s (WEN) trade at 52 week, multi-year or all time highs, stocks like Panera (PNRA) McDonald’s (MCD), Noodles (NDLS) & Chipolte (CMG) have had either recent growth deceleration or in the case of MCD, permanent.

What’s interesting about the disparate recent results and forward guidance is that it’s happening just as a new entrant comes to the attention of investors. Shake Shake recently went public under the ticker of SHAK on the NYSE. To many investors this was probably an unknown entity until its IPO as they only have 63 stores in five states and five separate countries. But their plan to access the public markets is tied to a rapid growth plan. If you don’t know about Shake Shack as a consumer, I assume you will soon.

SHAK is high quality, reasonably priced quick serve burgers, with the backing of a restaurant legend (Danny Meyer). Put very simply they have it going on, and the minute one of these shacks is within a few mile proximity to your current fast food burger fix (Burger King, MCD & WEN) I assure you will be out with the old and in with the new:


At the moment SHAK is not even that fly buzzing around the cow’s backside for MCD. SHAK has only $162 million in expected sales for 2015. MCD does about $70 million in sales globally, every day.  But like craft beers quickly making inroads against the Buds and Millers, MCD has lost a good bit of mind-share with consumers, and operations like Shake Shake only have one place to go, up.

Yeah, I know it’s trading at 10x expected sales.Which means the stock is not exactly, cheap. But if you were interested in buying shares of SHAK you would be doing some on the promise of their quality/value proposition, and their ability to disrupt and take share from some massive competitors who may be on the wrong side of consumer trends.

I would also add that while Wendy’s (WEN) is trading at 8 year highs, sales have declined every year since 2012, with its sharpest expected year over year decline of 23% since 2011.  It is not a mystery to me why a company like SHAK can have a $1.5 billion market cap with $162 million of expected sales while WEN (which has a similar product to it’s 2 behemoth competitors) has $4 billion market cap on an expected $1.85 billion in sales.

This fast casual assault on the fast food chains isn’t going anywhere and will only grow. If I were MCD’s new CEO I would make a knock-out bid for SHAK, put Danny Meyer on my Board of Directors and transform the fast food burger business before Meyer and other upstarts completely eat their lunch in the years to come.  Chipolte is already taking billions of burger, chicken and pizza dollars from dozens of competitors over the last 10 ten years by offering a cleaner, higher quality, environmentally friendly and healthier (perceived) product.  CMG had about $600 million in sales ten years ago, and is expected to do close to $5 billion this year. And SHAK isn’t even the only burger threat for MCD. There is Five Guys, In-N-Out, SmashBurger, you name it, all fragmenting the long time burger winners in different geographic markets. Something needs to be done and quickly to stem the sea-change that is occurring.  MCD should pull an Apple and do a massive Acqui-hire of the SHAK team. At first it will seem ridiculous. But a few years out it will be judged as sheer genius.

SHAK is  a long term buy and hold in my opinion on any meaningful pullback and I will look to start a position (despite valuation concerns).