Shake Shack Insiders Are Dumping Shares. Should You?

in INVESTING IDEAS by

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.

Recent Shake Shack Insider Transactions
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
TOTAL 1,653,604 $68,139,919

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).

Shake Shack's EBITDA multiple vs Peerssource: finbox.io

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.

SHAK Quarterly Revenue Growth CHart

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.

Shake Shack Valuation Detail
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%
Average $31.99 -23.7%
Median $30.86 -26.4%

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.

His work is frequently published at InvestorPlaceBenzingaValueWalkAAIIBarron’sSeeking Alpha and investing.com.

Matt can be reached at matt@finbox.io.


As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.
image source: CNBC

Expertise: Valuation, financial statement analysis. Matt Hogan is also 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. His work is frequently published at InvestorPlace, Benzinga, ValueWalk, AAII, Barron’s, Seeking Alpha and investing.com. Matt can be reached at matt@finbox.io or at +1 (516) 778-6257.

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