Burgers have been quite a rage in America over the past several years. From being a region-focused market to taking over global markets by a storm, the burger industry has come a long way. With the gourmet burger chains offering a diverse platter, the market has been spreading out with new entrants and expansion by established ones. Thus, burger stocks might be an interesting option for investors right now.
However, the situation isn't the same for all burger companies. Below we take a look at two burger stocks — Shake Shack Inc. SHAK and Red Robin Gourmet Burgers Inc. RRGB — that are poised differently this year. While Shake Shack holds much potential and is set for big gains, things aren’t that rosy for Red Robin.
Fundamentals
Shake Shack debuted as a public company on Jan 15, 2015, and its stock price scaled higher in the months that followed. Though Shake Shack came crashing back to earth in the later part of 2015, this made the stock less expensive by significantly bringing down its Forward Price to Earnings ratio from the previous levels of nearly 1000 times earnings.
Meanwhile, despite being a relatively expensive stock, Shake Shack does have solid growth potential. Menu innovation and limited time offerings are expected to maintain the comps growth trend in the near future. Also, the company is well positioned to boost earnings on the back of lucrative store economics, strong brand and solid balance sheet.
Shake Shack has also been focusing on highly valued millennial consumers who prefer brand experience and healthy food. Such efforts to meet consumer preferences have made it a hit among the younger generation.
The company’s cult following and successful expansion into various cities around the world have been driving growth for the stock. In the past three months, the stock has returned nearly 3%.
On the other hand, Red Robin has been witnessed rising costs and expenses since the beginning of 2016, mainly due to higher labor costs. Also, heavy investments in several sales building initiatives like advertising and technical upgrades coupled with pre-opening and remodeling expenses have been adding to the costs and thereby hurting margins. Evidently, the stock has declined nearly 17% in the past three months.
Moreover, given the impact of acquiring lower-margin franchise restaurants and higher labor costs, margins are expected to remain under pressure in 2016.
Additionally, American dining brands are keen on expanding in the fast growing emerging markets outside the U.S. However, Red Robin seems to be weak on this front. Thus, limited international presence has been a big disadvantage for the company.
Outlook
With its first-quarter results, Shake Shack raised its outlook for 2016. The company expects revenues in the range of $245 million to $249 million, up from $237–$242 million projected earlier. Meanwhile, for full-year 2016, comps growth is anticipated between 4% and 5% (earlier 2.5% to 3.0%). Shake Shack also revealed that its plans to open 16 stores in 2016, up from its previous target of 13.
Moreover, for 2016, sales and EPS are likely to improve 30.8% and 32.6%, respectively, further underlining the stock’s potential.
On the contrary, Red Robin lowered its total revenue growth guidance for 2016 from the range of 8.5% to 9.5% to just 8%, when it released its first-quarter results. Moreover, the comps growth guidance was lowered to flat to slightly negative from the previous expectation of an increase in a low single-digit range.
Earnings History & Estimate Revisions
It should also be noted that Shake Shack has surpassed earnings estimates in each of the last four quarters, with an average surprise of 71.43%. Moreover, the stock has room for plenty of upside, given the positive estimate revisions witnessed over the past 60 days. Over the past 60 days, the Zacks Consensus Estimate for 2016 and 2017 earnings has increased 7.7% and 10%, respectively.
Meanwhile, though Red Robin beat earnings estimates in each of the last four quarters, with an average beat of 8.42%, downward estimate revisions reflect pessimism regarding the stock’s prospects. The Zacks Consensus Estimate for 2016 and 2017 moved south by 8.6% and 10%, respectively, over the last 60 days.
Bottom Line
Investing in stocks at the opportune moment and exiting the underperforming ones help maximize portfolio returns. Hence, as investors, it would be prudent to add Shake Shack to the portfolio at the moment and get rid of Red Robin.
Shake Shack has been a well-known name among investors since its debut, and is likely to remain a favorite this year as well. This Zacks Rank #2 (Buy) company holds great potential in terms of growth, and should rally further as the year progresses.
On the other hand, Red Robin does not appear fundamentally strong at the moment with a Zacks Rank 4 (Sell). Additionally, a dreary outlook and declining estimates make the stock unfavorable.
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