Shake Shack, a food business that calls itself a “roadside burger stand,” is not finding much love in Wall Street after its stock has been downgraded by Morgan Stanley from an Equal Weight/Hold to an Underweight/Sell as the firm believes the stock is simply overpriced, Market Watch reports.
Analyst John Glass of Morgan Stanley has been covering Shake Shack since February and he believes that the stock is simply “expensive any way you shake it.” Forbes reports that the stock price for Shake Shack, Inc. fell by 5% in during pre-market trading on Tuesday and even plunged further to 10% after the opening bell. Shake Shack’s stock is now reportedly down by 9.3%.
Moreover, Business Insider reports that a note from Morgan Stanley explained, “While a powerful emerging brand executing on all its early commitments to its investors, [the] stock is overpriced, in our view, potentially reflecting both technical market dynamics as well as ‘brand’-related optimism that is not supported by fundamentals.”
In fact, Glass price target for Shake Shack’s stock is $38, about 29% lower than the stock’s current levels. Meanwhile, the firm also added, “While post IPO euphoria and elevated valuations are not new or unique to SHAK, the difference between what we see as fair value and current market price represents an extreme disconnect.”
As Glass explained to Forbes, “On 2017 estimates, it trades at nearly 80 times our EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and a lofty 325 times price-to-earnings.”
This is compared to Shake Shack’s peer group that trades an average of 17 times 2017 EBITDA and 65 times price-to-earnings. Glass concludes that the Shake Shack stock is a “poor relative value to the group.”
Furthermore, Morgan Stanley believes that the “extreme disconnect” of Shake Shack stock is due to at least three factors. First is that out of its 37 million shares, Shake Shack is only trading 5.75 million. Second, 2.6 million of the shares are being sold short and Morgan Stanley believes that investors would now find it “extremely difficult” to “express a view on valuation.” And lastly, there is simply a lot of hyped fascination surrounding the brand.
The Shack Shack brand actually prides itself in providing “high-quality food at a great value.” Moreover, the food chain recently launched its ChickenShackTM sandwich made up of chicken breast that is “all-natural and antibiotic-free” with lettuce, pickles and buttermilk herb mayo. It is currently being sold throughout its Brooklyn locations and will only be available for a limited time. The chicken sandwich is priced at $6.29.