FIN 4328 Student Managed Investment Fund II Prof. Therese Pactwa Spring 2015

Transcription

1 FIN 4328 Student Managed Investment Fund II Prof. Therese Pactwa Spring 2015 Prepared by: Michael Angelo Robert DellaValle Peter Figueroa Michael Garcia 1

2 TABLE OF CONTENTS Page I. Executive Summary.. 3 II. Company Overview III. Industy Analysis 5-8 IV. Fundamental Analysis V. Technical Analysis VI. Summary and Reccomendation. 17 2

3 I. EXECUTIVE SUMMARY Shake Shack is an American born, now international, quick service restaurant that focuses on fresh ingredients and guest service. They serve burgers and fresh cut crinkle fries sourced from local artisanal producers. Its target customers are people willing to pay more for fresh food as long as it is served fast. As consumers become more conscious of the source of their food and our environment, they are willing to pay a premium for these qualities. 1 OVERVIEW We believe that Shake Shack is a stock that will add value to our portfolio due to its core values which will make it stand the test of time. Shake Shack specializes in fast-casual food with fresh ingredients. Shake Shack focuses on guest service, quality ingredients, environmental friendliness, and being good neighbors. These qualities will foster the company s strength and longevity. Shake Shack is now an international company that has tripled its store count to 63 in the last two years. It has expansion plans to open at least ten restaurants in the United Stated each fiscal year. RECOMMENDATION: Buy 200 Shares at the price of 70 a share for 14,000 Shake Shack is a low risk investment due to its potential longevity and flexibility. They are focused on guest service, local high quality sources, and environmental conscious. Being environmentally responsible will not go out of style, rather it will become a necessity for sustainability. The restaurants offer flexibility by sourcing their ingredients locally and fresh. As eating trends change, they can source different ingredients to keep up with those trends. According to New York Times, the number two most expensed restaurant in 2013 was McDonald s which is presently facing its worst slump in ten years. Shake Shack offers a fast served, fresh alternative. This is Shake Shack s opportunity to gain, while McDonald s loses. Money spent on restaurants is increasing. American s are spending more money dining out, than on groceries. II. COMPANY OVERVIEW Shake Shack (NYSE SHAK) is a fast-casual food restaurant with locations in the United States and international cities. They are focused on fresh local ingredients, guest service and environmental responsibility. 2 Their menu is comprised of burgers, flat-topped hot dogs, fresh cut crinkle fries and frozen custard. All food is sourced from artisanal producers. Burgers are made from 100% allnatural Angus beef, vegetarian fed, humanely raised, without hormones nor antibiotics and source verified

4 Shake Shack stays green by composting and recycling bottles, cardboard, and plastics. Their cooking oil is reused to produce clean energy. Each Shake Shack is constructed from recycled and sustainable materials. Their tabletops sourced from reclaimed bowling alley lanes, their walls are made from reclaimed antique barn wood siding, and their booths feature lumber certified by the Forestry Stewardship Council. Shake Shack uses energy efficient kitchen equipment and employ LED lighting to reduce electricity consumption. Shake Shack refers to its customers as guests, evoking a warm and welcoming feeling fostering loyalty. Shake Shack s founder, Danny Meyers focus on customer service is highlighted in his book highlighting the importance of hospitality. 3 BACKGROUND In October 1985, Danny Meyers at age 27 opened the Union Square Café which is one of New York City s most revered restaurants. In 2000, Madison Square Park entered rehabilitation because it fell into poor condition. Meyer led the creation of the Madison Square Park Conservatory to assist in the redevelopment of the park. Randy Garutti, Meyer s Director of operations, opened a hot dog cart out of Eleven Madison, one of Meyer s restaurants. That hot dog cart was wildly successful during it s three years of operation. In 2004, NYC started taking bids for a kiosk restaurant in Madison Square Park. Meyer secured this opportunity and opened up his first Shake Shack in July He did not intend to begin a chain of restaurants, rather a single location designed for New York City. The tremendous success of the original Shake Shack revealed obvious opportunity for further expansion. Danny Meyer founded Shake Shack after his experiences as a child in the Midwest. Meyer s grew up in St. Louis dining on honest food and friendly service in restaurants such as Steak n Shake. He also frequented Ted Drewes enjoying frozen custard and concrete, a shake as thick as ice cream with various possible mix-ins. In his thirty years as a restauranteur, Meyer learned that warm customer service, a casual feel, and locally sourced quality ingredients pleased customers. Meyer is also a best-selling author of Setting the Table sharing his philosophy on the power of hospitality. 3 Shack-Announces-Fourth-Quarter-and-Fiscal-Year-2014-Financial-Results/default.aspx 4

5 Key Executives Of Shake Shack 4 Danny Meyer - Founder, Union Square Hospitality Group, LLC Randall J. Garutti - Chief Executive Officer, Director, Member of Nominating and Corporate Governance Committee and Member of Real Estate Committee Jeff Ultz - Chief Financial Officer and Member of Real Estate Committee Zach Koff - Vice President of Operations Ronald Palmese Jr. Esq - Vice President, General Counsel and Secretary Peggy Rubenzer - Vice President in People Resources Phil Crawford - Vice President Information Technology III. Industry Analysis Analysis of Competitive Forces Rivalry Shake Shack is considered to be in the restaurant industry but in a newer category known as the fast casual restaurant. Since Shake Shack is in this newer industry they are considered to have strong competition from rival sellers, but weaker than if they were also considered in the fast food industry. Some market share might be lost to fast food restaurants such as McDonald s or Burger King, but customers are then searching for a product that is different from what Shake Shack offers. Shake Shack is known for their quality and sit down casual restaurant. Some companies that Shake Shack competes with in this fast casual restaurant industry are: Panera Bread, Chipotle, Qdoba, In-n-out Burger, and Five Guys. Although some of these restaurants offer different kinds of food, the atmosphere and pricing for the companies are similar which makes them strong competition against Shake Shack. Threat of New Entrants Shake Shack has low pressures associated with the threat of new entrants. Shake Shack and other companies in the United States fast casual restaurant businesses, such as Panera Bread and Chipotle, have major advantages in this industry. These companies have cost based advantages which make it hard for new companies to enter the industry. Although any place new restaurant can sell burgers and fries, customers are most likely going to stay loyal to the brands they recognize. Customers know that Shake Shack has a standard of quality and would rather pay a little extra for that quality than purchase a burger at an unknown new store. These barriers in place cause this low pressure in the industry which benefits Shake Shack

6 Threat of Substitute Products There is a high threat of substitute products. Consumers are easily able to replace the products that they receive at Shake Shack. Consumers are able to buy burgers, fries, and shakes from almost any restaurant they encounter. Luckily Shake Shack has a casual fast food restaurant feel which is combined with a higher quality burger which draws in more customers. The most likely products that would be used to substitute the food at Shake Shack would be food that is made at a different fast casual restaurant. For example, if someone is in the mood for Shake Shack or another type of food they would most likely not be concerned with money so would look for quality and might substitute for Panera Bread. Bargaining Power of Suppliers In the industry that Shake Shack is in there is low bargaining power of suppliers. Since there is so much competition in the industry to create high quality burgers they are able to find supplies from anywhere. A high level of competition among suppliers leads to competition between suppliers to gain the business of companies in this industry. Suppliers lower prices or offer special discounts to continue to gain the business of companies in the industry. Bargaining Power of Buyers There is a high presence of powerful bargaining power of buyers reduces the profit potential for the company. The buyers increase competition within the industry by driving prices down. Buyers are then able to demand greater quality or lower prices since they are able to pit the competitors against one another. Shack Shake would have to lower prices if it lost a sizeable market share to a competitor. Management Strategies Relative to Industry Randy Garutti, CEO of Shake Shack, has been with the business since it started as a hot dog cart in His management theory is completely different than other food industries. In this fast casual restaurant industry, the companies are typically trying to improve their businesses to create a sustainable business culture. This is the case for Shake Shack, especially as it begins to expand its reaches even further. Randy Garutti is quoted saying, We want to be the best burger company in the world for our guests and for our team. We believe we have a unique opportunity to build something truly special in an interview with Jeff Haden of Inc.com. This statement was in a response to other companies in similar industries selling out when they became a global brand. Sustainability is at the forefront of the managerial strategy for Shake Shack and they are definitely not compromising their values when it comes to expansion. Randy says, We want to be the anti-chain chain that never talks in terms of units or how fast we can go. Instead he insists on finding ways to help the community in which they operate, find farmers to raise animals without hormones, and minimize the impact Shake Shack is having on the environment. The management of the company is also very different in that Danny Meyer hires only humble and able managers. The Chief Restaurant Officer named Sabato Sagria worked two months at the nine full service restaurants before he was able to lead the company. Danny Meyer wanted him to understand the restaurant from the inside and experience the spirit 6

7 of the restaurant. This training inside the restaurants keeps Shake Shack connected to the roots upon which it was founded on creating a fantastic company culture that doesn t exploit or use shortcuts. Shake Shack overview in its Industry Shake Shack is still in the first stage, the early stage, of the five phases of the industry life cycle. It is focused on expanding locations and advertising itself to people mindful of health and environmentally conscious. This type of customer base is growing as focus on health grows simultaneously. This should continue to increase profits as Shake Shack grows to meet the demands of a growing consumer base. 5 Due to Shake Shack s focus on fresh food and burgers it has competition in both of those categories. Their fresh focused competitors are Chipotle and Panera. It has competition in the burger base is Red Robin. The total 2014 gross profit for Panera was 861,698, Chipotle was 1,117,756, and Red Robin was 258,518 (All numbers in thousands). Shake Shack s revenue increased nearly 44% to million and this doesn t include the multiple new openings in Boston, California, New Jersey, and now Texas

8 Relative Industry Valuation 6 The chart above compares Shake Shack (SHAK), Red Robin (RRGB), Habit Resturants (HABT), Chiplote Mexican Grill (CMG), Panera Bread (PNRA), the S&P 500 average and the consumer goods restaurant industry. Shake Shack s two major competitors within the gourment 6 ^YHOH820","comparisonsColors":"#cc0000,#00ff00,#ff00ff,#9900ff,#000000,#f1c232","comparisonsWid ths":"1,1,1,1,1,1","comparisonsghosting":"0,0,0,0,0,0","range":"max"} 8

9 burger industry that are public are Red Robin and Habit, while their like competitors within the consumer goods restaurant industry are Chiplote Mexican Grill and Panera Bread. Shake Shack has only been public for a few months, however it has outperformed the rest of its public competitors by almost triple or more. IV. Fundamental Analysis Ratio Analysis Financial ratio analysis provides an assessment of a company s overall performance in terms of short-term liquidity, asset management and efficiency, long-term solvency, profitability, and market value. These ratios can be compared on a historical basis to evaluate a company s performance over time, and can also be used to compare a company relative to its industry and direct competitors. All ratios included in this report were obtained from calculating a company s numbers directly from their individually annually published 10K reports. Liquidity Ratios These ratios measure the short-term solvency of a company, or how readily it can convert shortterm assets into cash, and pay off current liabilities. Liquidity Current Ratio Quick Ratio Liquidity SHAK RRGB HABT CMG PNRA Current Ratio Quick Ratio Current ratio measures the proportion of a firm s current assets versus its current liabilities. A ratio over one means that the firm is able to meet its short-term debt obligations on time, while a ratio under one means that the firm may not be in sound financial health, and is unable to cover its debt. Shake Shack s current ratio has decreased drastically over the past three years because of their new found growth. This growth is not just domestically, but also internationally and will continue for the coming years. 9

10 Quick ratio (or acid-test) is also a measurement of short-term liquidity. To compute this number, inventory is subtracted from current assets because it is the least liquid current asset. Doing so decreases the quick ratio compared to current ratio but provides a better picture of the firm s ability to pay off debt since inventory cannot easily be converted to cash. Shake Shack s quick ratio is lower than their competitors because of their rapid growth they are experiencing. Their competitors are not currently experiencing the rapid growth, currently going on at Shake Shack. Profitability SHAK RRGB HABT CMG PNRA Percentage Of Revenue Growth Percentage Growth In Profits Percentage Growth Of Assets Net Profit Margin ROA ROE Profitability Percentage Of Revenue Growth Percentage Growth In Profits Percentage Growth Of Assets Net Profit Margin ROA ROE Net profit margin measures the amount of dollars earned for every dollar of sales generated by the firm. Net profit margin determines the earnings made by the firm for a given period of time. The higher the ratio s value, the more profitable the company is. Shake Shack s net profit margin has dropped from the previous year, due to their rapid growth. Return on assets (ROA) measures net profits earned as a percentage of the company s total assets. This number indicates how efficiently the company uses its assets to generate sales; thus, a higher ratio shows that more profits are earned using less investment. 10

11 Return on equity (ROE) measures the net income earned by the company as a percentage of shareholder s equity. Since this number shows the return to the money invested by shareholders, this ratio is often considered the true bottom-line measure of performance. Shake Shack s ROA and ROE have decreased because of their growth. Stock Valuation Using histrocial prices and projected rates from our forecast, we were able to calculate Shake Shack s instric value based off their store total at the end of the 2014 fiscal year. This valuation does not factor in the new stores Shake Shack has currently opened in the 2015 fiscal year or the hundreds of projected openings in the coming years. Projected EPS 5.45 Projected DPS 0 Projected ROE Sustainable Growth Rate: Valuation Average 2016E EPS P/E CFPS P/CFPS SPS P/SPS DPS Historical values for earnings per share were obtianed from Shake Shack s annual 10K. Numbers for cash flow per share and sales per share were calculated by using cash flow and sales numbers from Shake Shack s annual 10K divided by their total number of outstanding shares. The average values for each item were then calculated and multiplied by the growth estimates to determine the projected share prices for each approach. Estimated Sales Growth 0.04 Estimated Cash Flow Growth 0.04 Estimated Earnings Growth 0.04 Projected Share Prices: P/E Approach P/CF Approach P/S Approach AVERAGE

12 Market Price (as of 5/8/2015): With the current stock price of 67.95, Shake Shack s stock is currently highly undervalued against its instric value of Risk Factors 7 1. "Our long-term success is highly dependent on our ability to successfully identify and secure appropriate sites and timely develop and expand our operations in existing and new markets." Most Shake Shacks are located in high-revenue locations, such as Manhattan. This could change as the brand expands, Shake Shack explains in its filing to the Securities & Exchange Commission. The company is also particular about the type of people it wants to hire -- and it's meticulous about training. Having "friendly and motivated" workers as representatives of the brand is part of how Shake Shack tries to avoid being like other chain restaurants. Shake Shack workers don't currently have a collective bargaining agreement, and the company writes that "unionization activities may disrupt our operations and affect our profitability." Phased implementation of the Affordable Care Act could also affect the cost of doing business. 2. "Damage to our reputation could negatively impact our business, financial condition and results of operations." Obviously, the digital age is a double-edged sword for brand reputation. As much as Shake Shack relies on mouthwatering Instagram posts to spread the word about its business, a negative review or incident at a store could go viral. Also, Shake Shack could fall prey to a cyber attack, making customers feel like the company doesn't do enough to protect their information, when this is most definitely not the case. Shake Shack takes pride in the service along with the product they are providing the consumer. 3. "Food safety and food-borne illness incidents may have an adverse effect on our business by not only reducing demand but also increasing operating costs." Shake Shack worries about how an illness affecting beef would disrupt operations. Shake Shack is pretty tight-lipped about where it sources ingredients, and every location has only a few

13 days' worth of beef on hand. The company has five U.S. sources for raw beef and seven international ones: "Our proprietary blend of beef patties and/or raw materials for beef patties originate from the United States and the EU as well as Australia. In addition, our potato buns are exclusively from the United States, and other key items such as crinkle-cut fries and American cheese originate within the United States or the EU. While we have established secondary supply solutions for some of these ingredients, we have not acquired secondary supplies for all of them." 4. "Risks related to our international operations and our international licensed Shacks" Shake Shack gives the example of its Russian branch as international business affected by broader political and economic factors. Western sanctions against Russia have affected the brand's ability to import high-quality ingredients, "We have given our licensee in Russia approval to utilize alternative ingredients not affected by the sanctions, but there is a risk that these substitute ingredients may be inferior in taste and quality or come from suppliers that have not been vetted for food safety and quality assurance." This can be a bad hit to a company Shake Shack who bases their popularity largely on serving high-quality food at a fast-food pace. Shake Shack also counts "anti-american sentiment" as a risk to business in markets such as the Middle East. Being perceived as an "American brand" could make the company a target for boycotting or even violence. 5. "We face significant competition for guests and our inability to compete effectively may affect our traffic, Shack sales and Shack-level operating profit margins." Have you ever seen a Shake Shack commercial? Minimal advertising is part of the brand ethos. Expansion might require the digital and social media strategy of the brand to shift as the company spends more on advertising, Shake Shack says. We may need to make greater investments than we originally planned in advertising and promotional activity in new markets to build brand awareness. Forecasting INCOME STATEMENT Shack sales December December December 31, December December 28, 30, 25, 26, , , ,042 78,587 55,591 13

14 Licensing revenue 9,656 TOTAL REVENUE 176,406 Shack-level operating expenses: Food and paper costs 51,978 Labor and related expenses 43,624 Other operating expenses 16,655 Occupancy and related expenses 14,515 General and administrative expenses 27,067 Depreciation expense 8,645 Pre-opening costs 9,086 Loss on disposal of property and equipment 156 TOTAL EXPENSES 171,728 OPERATING INCOME 4,678 Interest expense, net 540 INCOME BEFORE INCOME TAXES 4,137 Income tax expense 985 NET INCOME 3,152 8, ,546 43,180 36,240 13,836 12,058 22,486 7,182 7, ,660 3, , ,619 6, ,530 34,925 29,312 11,191 9,753 18,187 5,809 6, ,387 3, , ,118 3,869 82,456 23,865 20,096 7,315 6,892 12,453 3,541 2, ,521 5, , ,432 1,447 57,038 16,774 14,436 5,081 5,053 6,988 2,162 1,858 52,352 4, , ,133 Pro-forma earnings per unit: Basic Diluted Pro-forma weighted-average units outstanding: Basic 29,977 29,934 29,652 Diluted 30,122 30,018 29,918 14

15 V. Technical Analysis Stock Price since IPO on 1/30/2015 The chart above represents the increase in the Stock price over the passed 5 months. The IPO came out at 21 a share and closed on the day at 52, dropped down to 38 a month later but than rose at a rapid growth rate of over 45%. The bottom part of the chart shows the share trading volume of Shake Shack. This shows the increase in the amount of shares being bought and sold, and as you can see it has been increasing as the months go on. 15

16 The chart above compares Shake Shack to Chiptole, Habbit, S&P 500, Nasdaq, and Dow Jones over the last 4 months. Shake Shack has been out performing them all since March. March is when they came out with the new news of opening up multiple shacks and its stock price grew over 45-90% higher than its compitors along with the market indexes. This again proves that Shake Shack is not just a trending stock but a high powering company that we believe will be an industry leader for years to come. Moving Average since 1/30/

17 The above chart represents rapid growth of Shake Shack s 50 day Moving Average and the bottom of the chart represents the increase of Shake Shack s Money Flow over the past 4 months in billions. VI. Summary and Recommandation Shake Shack Inc. (SHAK) has been leading its industry since its IPO and over the passed 3-4 months because of its potential in growth. It s a huge and popular burger restauraunt all over New York. They have 41 stores open domestic and 27 licenced abroad as of today and their goal is to have 450 stores open within the next 5 years. They don t havemuch marketing services right now but they said they will be adding them. Their main source of adverstisement is through Instagram and the word of mouth and posts by custumers. They have recently opened 2 new stores in Boston, another 2 in New Jersey, and just last week opened one in Austin, Texas. They are also opening another in California in the beginning of We believe their earnings weren t that great their first quarter as a public company because their main and orginal Shack was not operating due to renovations, along with their Shack in Citi Field due to the baseball season not being started. We believe with their long term goal of 450 new Shacks being opened in the next 5 years that they will be a continueing and strong high growth stock for our portfolio. We are proposing to buy 200 shares of Shake Shack at the Stock Price of 70 or current Market Price which would cost us about 14,

18 IMPORTANT DISCLAIMER This report was created by a student(s) enrolled in the Student Managed Investment Fund (SMIF Fund) program at the St. John's University s Tobin School of Business. The intent of these reports is to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of SMIF Fund students. SMIF Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, St. John's University, its faculty, staff, students, or the SMIF Fund may hold a financial interest in the companies mentioned in this report. 18