Shake Shack Falls After Wedbush Downgrade on Valuation

Shake Shack stock has well more than doubled since the spring. Wedbush cut its rating but still sees promise at the burger chain.
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Shares of Shake Shack  (SHAK) - Get Report dropped nearly 4% Friday after analysts at Wedbush downgraded the company to neutral from outperform on valuation concerns. 

Analyst Nick Setyan notes that shares have well more than doubled off an April low. But the investment firm is optimistic about the New York burger chain's ability to add domestic units and expand its addressable market. 

"As management rolls out units with Shack Tracks (both walk-up and drive-up) and tests its first drive-through locations in 2021, we believe SHAK's addressable market will expand from management's pre-covid target of 450 domestic company units," Setyan said, according to Seeking Alpha. 

Setyan reiterated a $77 price target on the restaurant company. Shake Shack shares at last check were down 3.7% at $75.50. The stock touched a 52-week low just above $30 in mid-March. It has come off a 52-week high near $87, set earlier this month.

Shake Shack's margins are expected to stabilize in the low-20% range over the next three to five years as new unit inefficiencies decline, according to Friday's note. 

Last month, analysts at Oppenheimer initiated coverage of the burger chain with an outperform rating and $90 price target.

The New York company's strong unit economics drive the industry's best unit-growth story, according to Oppenheimer analyst Michael Tamas.

"Our work also identifies catalysts for a bullish recovery in same-store sales and we also highlight a path for margin-driven Ebitda upside vs. consensus through 2022," Tamas said.

"Improving investor sentiment could serve as an incremental tailwind for [the] shares as only 20% of analysts' ratings are bullish -- the lowest buy-rated name in the group."