What is the valuation of Shake Shack (SHAK)?

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Double burger Shake Shack(10,000 people had read this post as of January 27, 2015)

Updated January 30, 2015- Told you so. I wrote yesterday for the public record (see below) that Shake Shack (SHAK) shares were undervalued at $21 and would go to $40 today. Shares are trading now at $50, or 133% above the IPO price.

How did I know? I invented the most reliable form of stock valuation (read below), and am still the best stock picker in the business.

Danny Meyer made at least $260 Million today, personally, on this IPO at these prices. The entire IPO made much more for shareholders. By the way, if you buy some stock, you can demand faster service, perhaps (dream on).

Update January 29, 2015- By Steven E. Greer

SHAK will start the trading Friday at $21, or a market cap of $741 Million. By our estimates, below, that is a billion or so undervalued, so look for the stock to shoot to $40.

Update August 9, 2013- Danny Meyer was on CNBC today discussing the new Shake Shack fries, and nuances of fine dining, when the obnoxious Maria Bartiromo crassly vulgarly asked, “What’s the end game? When are you going public?” Refreshingly, Mr. Meyer replied, “After hearing your previous story about activist investors, I can’t think of anything I’d rather less like to do than go public.” (See last paragraph below whereby we advised against becoming public)

July 14, 2013- By Steven E. Greer, MD

I was sitting at the Downtown Blue Smoke, one of the five in the Union Square Hospitality Group (USHG) empire, and discussing the upcoming Major League Baseball All-Star game next week, to be held at Citi Field. There is a Shake Shack and a Blue Smoke at Citi Field, (as well as at the Washington Nationals field). Since the Mets sucketh so, most people really go to a game for the experience, and that experience now is the great food at Citi Field.

A thought then struck me like lightning, “Jesus Christ, imagine what it must be earning“. Actually, that is a lyric that came to mind.

Having pioneered the valuation methods for biotech stocks now widely used by Wall Street analysts, I started to do a back-of-the-envelope estimate in my head. I then more properly modeled it out at home, being bored out of my mind with nothing better to do.

Grilled smoked chickenWith the success of the expanding Shake Shack chain of USHG, the New York Times made a similar attempt to estimate the valuation of USHG back in 2009, but they simply compared top-line revenues to other “better burger” chains. I used a sum-of-parts, net-present-value of the discounted after-tax earnings, method to derive a very conservative valuation for USHG. This is far better than using arbitrary multiples of revenue or earnings.

As you will see, I made some absurdly conservative assumptions. First, to avoid the controversy of how to handle revenue streams many years out, I simply assumed that 100% of the valuation of USHG is dependant on Danny Meyer’s 3-pounds of gray and white matter, and that he will retire around age 65. So, I only valued ten years of business activities, out to 2023.Chocolate cake

Next, I used some standard assumptions, such as an operating profit margin (EBITA) of 22%, tax rate of 25%, and discount rate of 5%. The key unknown variables and required assumptions are the top-line revenues per store for the various franchises under the USHG umbrella.

For each Shake Shack, I assumed a revenue of $5 Million (NY Times assumed $4 Million in 2009), with 33 current stores. For each Blue Smoke, I assumed a revenue of $9 Million (which could be way off). For each fine dining restaurants, such as the Gramercy Tavern, I assumed a revenue of $13 Million, which again is likely way off, erring on the conservative side. They also have a premier catering service that lands prestigious gigs such as The Robin Hood foundation, feeding 4,000 hedge fund tycoons. I took a guess at revenue for that being $10 Million with a higher profit margin. Also, being even more conservative, I am leaving out altogether other enterprises under USHG, such as the consulting services and new juice bars at Equinox gyms.

Using those assumptions, the current USHG is worth $474 Million. Shake Shack and Blue Smoke comprise 66% of the valuation of USHG.

Then, I had some fun making reasonable assumptions on expansion of the Shake Shack and Blue Smoke chains. Five Guys Burgers and Fries as more than 500 locations, as a reference. If Shake Shack expanded to only 200 stores, and Blue Smoke went to 100 stores, then the USHG becomes worth $2.9 Billion. With those assumptions, 94% of the worth of Danny Meyer’s empire would be derived from Shake Shack and Blue Smoke.

Being more realistic, assuming Danny Meyer were to take Union Square Hospitality Group public under the ticker USHG, the real-world investment bankers at Goldman Sachs would give it a much higher valuation. They would not assume the company comes to an end in 2023, and would assign price-to-earnings (P/E) ratios to derive a market rate valuation for the IPO. USHG would be valued at close to $10 Billion, easily.

Recent IPO’s of far lesser brands, such as the Noodles chain, ticker NDLS, have market caps of a little more than $1 Billion. McDonald’s, ticker MCD, has a market cap now of $100 Billion, which would be the main industry comparison for USHG. Chipotle Mexican Grill, ticker CMG, has a market cap now of $12 Billion, which is a comparison for Blue Smoke.

However, if I were Danny Meyer’s chief strategist or banker, I would advise him to stay private, but continue expanding at an acceptable rate without compromising quality. The reason is that publicly traded restaurants instantly become the target of shareholders who only care about maximizing earnings at the expense of quality. Everything that makes Shake Shack great would be in jeopardy. For example, the excellent friendly staff, who are currently polar opposites to fast food employees, are made possible due to innovative perks USHG provides. That way of doing business would be challenging if institutional investors demanded higher and higher margins on each quarterly call.

I would advise Mr. Meyer that, much like Michael Bloomberg who runs a private company, he too can continue to have his cake and eat it too, by expanding at the proper rate while growing the wealth of USHG private stakeholders. Depending on the percent of equity Mr. Meyer has in USHG, he is worth nearly a billion today, and still runs a highly respected company. There is no reason to sell out to the markets now.


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2 Responses to What is the valuation of Shake Shack (SHAK)?

  1. JJ says:

    Shake Shack (SHAK) IPO data from S1

    2012 sales $57M, Earnings $4.1M , 21 stores
    2013 sales $82M , Earnings $5.4M , 40 stores
    2014 sales $84M, Earnings $3.5M , 53 stores (thru Sept.Q)

    domestic stores $5.3M sales per store

    international stores $9.7M sales per store

    margins roughly 26%

  2. Editor says:

    same store sales in US have stopped growing

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