Shake Shack executives and insiders have sold $68.1 million worth of stock since November. It’s worth taking a closer look at the company with the stock trading at a rich valuation and Q4’17 earnings around the corner.
Insider Selling: Shake Shack
A number of insiders have been selling shares of Shake Shack (NYSE: SHAK) according to recent form 4 filings with the SEC. Notable insiders include Daniel Meyer (founder), Randall Garutti (CEO) and Jonathan Sokoloff (Director) among others, as shown in the table below. Total insider selling has totaled $68.1 million since November which is approximately 6.2% of Shake Shack’s total market capitalization.
|Insider Trading||Relationship||Date||#Shares||Value ($)|
|Daniel Meyer||Founder||Feb 01||100,000||$4,290,145|
|Select Equity Group||10% Owner||Jan 03||52,276||$2,354,197|
|Daniel Meyer||Founder||Jan 02||100,000||$4,378,740|
|Randall Garutti||CEO||Dec 26||11,000||$491,003|
|Daniel Meyer||Founder||Dec 18||100,000||$4,593,090|
|Select Equity Group||10% Owner||Dec 14||85,556||$3,883,122|
|Select Equity Group||10% Owner||Dec 13||10,008||$457,880|
|Peggy Rubenzer||SVP||Dec 08||5,000||$231,827|
|Green Equity Investors||Director||Nov 30||222,867||$9,066,039|
|Jonathan Sokoloff||Director||Nov 30||222,867||$9,066,039|
|Green Equity Investors||Director||Nov 29||300,000||$12,014,472|
|Jonathan Sokoloff||Director||Nov 29||300,000||$12,014,472|
|Randall Garutti||CEO||Nov 24||8,000||$297,890|
|Peggy Rubenzer||SVP||Nov 14||5,400||$204,644|
|Daniel Meyer||Founder||Nov 10||15,000||$571,268|
|Daniel Meyer||Founder||Nov 09||15,000||$556,692|
|Koff Zach||COO||Nov 09||5,000||$185,000|
|Daniel Meyer||Founder||Nov 06||10,000||$366,604|
|Select Equity Group||10% Owner||Nov 03||50,630||$1,851,425|
|Daniel Meyer||Founder||Nov 03||35,000||$1,265,370|
Meyer most recently sold $4.3 million worth of shares on Thursday, February 1st. This is what propelled me to take a closer look at the company’s insider activity.
Potential Reasons For Insider Activity
Shake Shack owns and operates Shake Shack restaurants in the United States and internationally. It offers hamburgers, hot dogs, crispy chicken, crinkle-cut fries, shakes, frozen custard, beer, shakes, wine, and other products. As of December 28, 2016, it had 114 Shacks, including 64 domestic company-operated Shacks, 7 domestic licensed Shacks, and 43 international licensed Shacks.
Analysts covering the stock often compare the company to a peer group that includes Zoe’s Kitchen (NYSE: ZOES), Chipotle (NYSE: CMG), McDonald’s (NYSE: MCD) and Bojangles (NasdaqGS: BOJA). Analyzing Shake Shack’s valuation metrics and ratios relative to its peer group offers insight into why insiders may be selling their shares.
Shake Shack’s EBITDA multiple is calculated by dividing its Enterprise Value by EBITDA and is often used to benchmark the fair market value of a company. Its key benefit over the P/E multiple is that it’s capital structure-neutral, and, therefore, better at comparing companies with different levels of debt.
Shake Shack’s LTM EBITDA multiple of 28.2x is above all of its selected comparable public companies: ZOES (12.8x), CMG (20.5x), MCD (15.0x) and BOJA (8.3x). The company’s forward EBITDA multiple of 26.8x is also above all of its peers: ZOES (13.4x), CMG (17.8x), MCD (15.9x) and BOJA (8.2x).
High growth companies typically trade at a premium valuation multiple which could help explain Shake Shack’s high multiple. The company’s revenue growth has ranged from 40.9% to 60.8% over the last four fiscal years – quite impressive.
However, on a quarterly basis Shake Shack’s revenue growth has ranged from 26.9% to 43.5% over the previous six quarters. The company’s top-line growth appears to be trending lower on a quarterly basis as illustrated in the chart below.
Could the recent insider activity be a sign that the company’s high growth days are in the rearview mirror?
Shake Shack is expected to report its Q4’17 earnings on February 15th after the market closes. Wall Street is expecting the company to report $93 million in sales which would represent 26.7% growth YoY. With the stock trading at such a high valuation, shares could take a big hit if management reports earnings that miss analyst expectations.
Time To Take Some Chips Off The Table?
The fast-food company’s shares last traded at $41.91 as of Friday, up 33.7% over the last six months. While the stock has made impressive gains, the recent insider transactions could signal a troubling road ahead for shareholders.
In addition, finbox.io’s average fair value estimate of $31.99 implies -23.7% downside and is calculated from 6 valuation models as shown in the table below. Each analysis uses consensus Wall Street estimates for the projections when available.
|Analysis||Model Fair Value||Upside (Downside)|
|10-yr DCF Revenue Exit||$27.51||-34.4%|
|5-yr DCF Revenue Exit||$34.21||-18.4%|
|Peer Revenue Multiples||$23.90||-43.0%|
|10-yr DCF EBITDA Exit||$35.96||-14.2%|
|5-yr DCF EBITDA Exit||$43.07||2.8%|
|Peer EBITDA Multiples||$27.30||-34.9%|
While executives are always happy to tell you all the reasons why their stock is a buy, their actions can tell a different story about the company’s future prospects. A trend of selling activity may indicate that executives think the stock is going down over the upcoming time period, and are trying to sell before the price falls.
Investors long shares of Shake Shack may want to re-evaluate their positions prior to earnings.
Author: Matt Hogan
Expertise: Valuation, financial statement analysis
Matt Hogan is a co-founder of finbox.io. His expertise is in investment decision making. Prior to finbox.io, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset’s fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock.
Matt can be reached at firstname.lastname@example.org.