Facebook
Twitter
I am mystified as to why investors bid up certain stocks to the point of insane valuation. That’s the case with Shake Shack (NYSE: SHAK) which, despite delivering great second-quarter earnings, is valued at levels that defy belief.
More on that in a moment. First, however, let’s look at the very impressive Shake Shack earnings numbers.
Shake Shack’s total revenue, which is 96% food sales and 4% licensing revenue, exploded 75% to $49 million, up from $28 million a year earlier.
Soaring Same-Store Sales
Now, we have to be careful not to get too excited about a 75% increase, because a lot of that increase came from new store openings. That’s why we focus on same-store sales, or as the company calls them, “Same-Shack sales.” Most restaurants are thrilled to have mid-single-digit increases. Shake Shack delivered a 12.9% increase, which is simply phenomenal. Moreoever, that was almost triple the 4.5% growth from last year.
This came on a 7.4% increase in average weekly sales, which rose to $102,000 from $95,000.
Even more impressive is that in a business where overhead and commodity prices can kill a company, Shake Shack expanded gross margins by 470 basis points to 30.3%.
There was even more good news. General and administrative expenses only increased to $6.1 million from $3.6 million in the same quarter last year. Because the increase was so modest, it led to a lower ratio of G&A expense to revenue – 12.5% versus 13.1% last year.
I don’t like to look at “net income attributable to Shake Shack” because there’s some complicated accounting that shuffles much of the net income off to non-controlling interests. Instead, I look at the net income and operating cash flow, which were $5.14 million and $6.244 million for the second quarter, respectively. Net income was up about 160% with operating cash flow almost tripling.
Size Matters
So all of this is really great news, along with the company’s $65 million in cash. However, investors need to understand that Shake Shack is a minuscule operation. It only has 63 stores, of which 31 are domestically operated, five are domestically licensed, and the rest are internationally licensed.
This is nothing. McDonald’s (NYSE: MCD) has 36,000 stores across the globe. Everyone is freaking out about what is really just another burger n’ fries joint. I don’t even like to talk about price-earnings ratios here because we’d be talking about a number in the hundreds.
Instead, I like to make a comparison regarding the value of a Shake Shack store compared to other burger chains.
Insane Overvaluation
McDonald’s has 36,000 stores and is valued at $94.7 billion, or $2.6 million per store.
Burger King and Tim Horton’s, which now operate under the Restaurant Brands International (NYSE: QSR) ticker, is valued at $19.9 billion with 19,000 restaurants, or about $1 million per store.
Wendy’s (NASDAQ: WEN), which has been really struggling, has its 6,500 stores valued at $2.8 billion, or $420,000 per store.
Shake Shack, with its 63 stores, is valued at $2.5 billion or … $39.7 million per store!
You read that correctly. The market thinks a single Shake Shack is worth 15 times more than a McDonald’s restaurant. That’s insane, and that’s why the company is insanely overvalued. I wouldn’t go near the stock at these levels, and neither should you.
Dividends for Every Month of the Year
If you’re looking for just one dividend stock to round out your income stream, consider a little-known company that pays out dividends 12 months of the year.
Click here to see the full details of this company in my Dividend Calendar…