Longbow: Here's How Profitable Shake Shack Will Need To Be To Deserve Its Valuation

In a report published Thursday, Longbow analyst Alton Stump maintained a Neutral rating on Shake Shack Inc (NYSE: SHAK) .

Shake Shack is a fast-casual restaurant concept focusing on offering premium antibiotic-free burgers as well as hot dogs, fries, shakes, beer and wine.

Shake Shack's current valuation reflects the company's growth potential and its ability to generate EBITDA of $170 million. Also, there is not adequate evidence to show that the company can succeed outside of its home market, Manhattan.

"In order to reach this level of profitability, SHAK will likely need to reach the company's long-term of 450 domestic locations over the next 7-10 years and also generate store-level margins similar to Chipotle (CMG—NEUTRAL) during the equivalent stage of CMG's growth cycle," analyst Alton Stump mentioned.

In the report Longbow noted, "Given the fact it could take the better part of a decade (if not longer) for SHAK to reach 450 stores and the company would undoubtedly be at least in the second half of its growth cycle at that point, we believe a mid-teen forward EV/EBITDA multiple is an appropriate valuation to assume for the shares of Shake Shack in the long-term."