What's The Deal With Shake Shack's Valuation?

• Shares of Shake Shack Inc (NYSE: SHAK) have risen by 5.69 percent year-to-date.
• Cowen’s Andrew M. Charles has initiated coverage of Shake Shack with a Market Perform rating and price target of $42.
• The stock’s premium valuation indicates that investor expectations might be too high and that continuing beat and raise might be priced in.

Charles believes that the sales volumes (AUVs) in the first year are being used by investors to gauge future performance. The premium valuation of the stock indicates expectations that volumes outside Manhattan would continue to beat the targeted of $2.8-$3.2 million in the long term.

However, according to the Cowen report, “As new openings skew to existing markets outside of Manhattan, we believe this is too early to conclude, especially given the significant decline in AUVs when SHAK entered high-profile new markets outside of Manhattan.”

Given that only a third of the company’s annual openings are in new markets and two-thirds are in existing ones, Charles expressed concern that Shake Shack has only a small number of high-profile markets left to enter.

On the other hand, further development in the existing markets is expected to occur in areas with lower foot traffic. “Both of these factors should weigh on first year AUVs, leading to a declining ROI profile as the concept rapidly grows,” Charles stated.