Reporter's Notebook

Shake Shack's IPO valuation outperforms the industry

Owners of high-growth restaurant chains looking to raise some cash would be silly to do anything but sell stock to the public, and last week’s IPO of Shake Shack Inc., proves that.

While the Shake Shack IPO didn’t quite generate the first-day pop of some other concepts — its 118-percent increase on the first day was only the third largest in the industry over the past two years — by other measures it still far outperformed its fellow concepts.

Shake Shack initially expected to price its shares between $14 and $16, but pre-IPO interest ultimately drove that price to $21. At its peak on Friday, shares traded at $52.50 before coming down, closing at $45.76.

That gave the company a valuation of $1.6 billion after the first day of trading. That’s for 63 locations, only half of which are company owned. That’s an incredible valuation for a company that reported just $83.8 million in revenue the first nine months of 2014, and just $708,000 in net income.

That initial valuation calculated out to be about $25.4 million per location. That includes all 63, including those that are licensed.

Compare that to, say, Chipotle. It went public in 2006 and its stock doubled on its debut. At the end of its first day, the company had a valuation of $1.4 billion. But at the time, it had revenues of $628 million and a net income of $37.7 million. It also had more than 500 locations and a long track record of consistent growth. On a per-unit basis, that valuation was only about $2.7 million. Which seems really reasonable when you think about it.

Shake Shack’s valuation is remarkable even when compared with the batch of recent, high-priced restaurant company IPOs.

Shack was the fourth chain to top Chipotle’s first-day pop over the past two years. And by some measures it far outperformed those other concepts.

The Habit Restaurants Inc., went public late last year. It’s bigger than Shake Shack, with 98 restaurants and $120.4 million in revenues. But that’s still fairly small, and by the end of the day it was valued at nearly $1 billion after its stock rose 119.7 percent, to $39.54.

The initial valuation was about $10 million for each of the chain’s 98 units.

In 2013, Noodles & Company went public, rose 104 percent on its first day, and then grew even more afterwards, topping $50 a share at one point. At its peak, the company’s valuation approached $1.5 billion. But it was more developed, like Chipotle, with 327 locations at the time. That gives it a valuation of $4.5 million per unit.

In 2013, Potbelly rose 119.8 percent on its debut and had a valuation of less than $900 million — or about $3 million for each of the chain’s 286 units at the time.

But that’s how things are in the stock market these days with respect to the restaurant business. IPOs are carefully crafted to achieve a peak early valuation. The number of shares being sold are limited. Investors are interested in growth names. And they know restaurants. All of that combines to drive the prices up.

In Shake Shack’s case, it has an outsized brand reputation for the number of units it has and is located in New York where many investors live and eat burgers. 

Ultimately, however, this hysteria wears off. Some early buyers sell shares at peak prices. The companies’ numbers shine through and the stock prices fall.

Indeed, of the previous four restaurant chains that saw their values double on their first day of trading, only Chipotle has managed to continue its stock price growth over a long stretch.

Potbelly declined and is now trading near its $14 offering price. Noodles lost half of its all-time share price high and is now trading between $25 and $26 a share. Even Habit Burger has seen a decline, with its stock price now trading at around $30 a share. 

TAGS: Finance
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