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CNBC.com: Scott Rostan “Burger stock bull market beats market by double”


By Evelyn Cheng

Shake Shack executives couldn’t have picked a better time to take the fast-casual chain publicAnd not just because the stock market is in the middle of a raging five-year bull market. Burger stocks, in particular, are in the middle of an even bigger rally. CNBC.com took a market-cap weighted basket of burger stocks and found the index had double the returns of the S&P 500 for the last five years.

Key member of the burger portfolio, Jack in the Box, recently got an upgrade to “outperform” at Wedbush Securities. The firm said a major driver for growth is cheap gas, which the EIA expects will add $750 to household incomes this year.

“All the restaurants have outperformed S&P,” said Wedbush’s Nick Setyan. “With gas prices dropping, restaurants have seen 15 to 20 percent growth across the board.”

The “Burger Index” looked at five hamburger-focused firms that were distinct from multinational fast-food chains. Jack in the Box, which also owns Qdoba, gained nearly 47 percent in the last six months. Red Robin Gourmet Burgers gained 21.5 percent in the last six months. Steak ‘n Shake operator Biglari lost 0.8 percent in the last six months but is up 32.4 percent for the last five years. Luby’s, whose brands include Fuddruckers and Cheeseburger in Paradise, lost about 5 percent in the last six months but gained 41 percent in the last five years. Habit Restaurants, which went public in November 2014, is up 1.6 percent so far this year.

Shake Shack will trade under the ticker “SHAK” and is expected to raise about $105 million, with a valuation of more than $700 million. Itsshares priced at $21 each on Thursday.

Restaurants are a primary beneficiary of increased consumer spending from lower gas prices because the eateries are not affected by Internet inroads on retail, he said.

Among the restaurants, the burger market is the “largest dine-out segment in the United States with more than $72 billion in 2013 sales, according to Technomic,” Shake Shack said in its prospectus. “Given its role as the quintessential American meal, burgers have also proven to be the most portable concept internationally, with an estimated global market size of over $135 billion.”

Shake Shack has 36 locations in the United States and 27 abroad, mostly in the Middle East, for a total of 63 stores. The company added that it plans to open 10 company-operated stores (versus licensed stores) every year and sees potential for 450 new U.S. locations.

Such expansion should not compromise Shake Shack’s ability to maintain the quality food and brand that keeps lines long at every location, some analysts said.

Marc Chaikin of Chaikin Analytics knows Shake Shack founder Danny Meyer and noted how, in a non-New York expansion, the company established a base in downtown Philadelphia and waited more than a year before opening another store in the suburbs.

Meyer opened the first Shake Shack in New York City’s Madison Square Park in 2004 but didn’t launch a new location until nearly five years later.

“With a disciplined approach to new Shack development and a successful track record in site selection, we are positioned well for future growth,” the company said in its filing.

Still, Stephens analyst Will Slabuagh noted that “margins will most likely come down as they leave Manhattan.”

The prospectus showed that self-reported operating profit margin was 11 percent less for non-Manhattan locations. The filing also lowered expected revenue per store to the $2.8 million-$3.2 million range as new locations will likely be outside Manhattan.

The average Shake Shack U.S. location generated $5 million in revenue in 2013, more than twice Chipotle’s $2.2 million, said Scott Rostan, president and founder of Training The Street.

That high growth potential and high unit volume will outweigh Shake Shack’s relatively unexciting implied trading value of 3.2 times forward sales, he said. “Sonic currently trades around 3.5 times next 12 months expected sales; Jack in the Box 2.5 times; Chipotle 4.6 times.”

Burger chains are making their own mark against fast food giants such as McDonald’s. With consumers valuing quality ingredients more, Shake Shack’s use of 100 percent all-natural Angus beef and other advertised natural ingredients is appealing and puts the company into the growing category of “fast casual” dominated by Darden and Chipotle.

Stephens analyst Will Slabaugh is bullish on small-cap, fast-growth companies in that sector. There’s “very strong appetite for the restaurant brand name among Northeast investors,” he said. SHAK “will be very well received.”

To be sure, analysts cautioned that earnings reports will be the real measure of whether a burger stock is fundamentally a buy.

“Whenever it ends up trading, the next week or so has nothing to do with price point. Demand for growth, particularly in restaurants, is beyond realistic levels,” Setyan said.

However, the opportunities for burger chains are increasing, especially with the recent upset at McDonald’s weak same-store sales and the departure of its CEO. There’s a void being left by the world’s biggest burger chain and these companies are filling it.

As for Shake Shack, the fast-food market was never a threat to it.

“It caters to a different demographic that is looking for higher-quality, quick service than fast food at a higher price point,” said Greg Wank, chair of Anchin, Block & Anchin’s Food and Beverage Services Group. “This likely makes their margins higher than the publiclytraded fast food burger places, which should lead to stronger cashflow.”

Slabaugh sees slowing growth in other burger chains such as Habit and the privately held Smashburger and Five Guys.

“It’s a very big market that they can take share from,” he said.