I believe Paul Tudor Jones (Trades, Portfolio) is one of the most gifted investors of the modern era. Jones has made a name for himself by following his simple yet difficult-to-implement methodology: "The best profit-maximizing strategy is to own the fastest horse."
The latest 13F filings are out, and my favorite trade from Jones in the fourth quarter of 2022 was the addition of 11,473 more Shake Shack shares. Although Jones has not disclosed his rationale for investing in the Shaquille O'Neil-backed fast food chain, a few variables exist that make me optimistic on the company's future; let's take a look.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Shake Shack recently beat earnings
A noteworthy event that recently occurred is Shake Shack's fourth-quarter earnings beat, which saw the fast food company stroll past estimates by achieving year-over-year revenue growth of 17.3% and dominating its bottom-line target by five cents per share.
Although rumors have surfaced that customers are increasingly dissatisfied with Shake Shack's price increases, hard data suggests the company's sales are growing exponentially. The company's full-year system-wide sales surged by approximately 22% while it also managed to add 69 new outlets, which adds nearly 18% net capacity to its ecosystem.
Furthermore, the company's same-store sales grew by 7.8% in 2022. I believe the same-store sales will keep improving in the coming year as moderating input costs will allow the company to implement more pricing increases. Moreover, Shake Shack's growing market share is worth noting, as a higher market share usually leads to a stronghold over industry suppliers and customer loyalty.
Another aspect to consider is China's reopening, which is set to free up both sales capacity and supply chains. In fact, Shake Shack's CEO, Randy Garutti, recently highlighted the company's outlook on China by stating that "volatility in our China Shacks has subsided in January, and we are cautiously optimistic that things can begin to level out towards a more normalized sales environment internationally this year."
Lastly, it is worth highlighting a pending recovery of the company's profit and loss statement. Shake Shack suffered from severe increases in input costs last year, stemming from both variable and fixed costs. The company's expenses are likely to taper this year, raising the possibility of a positive bottom line, which could be priced favorably by financial market participants.
Company fundamentals and key metrics
A look at Shake Shack's fundamental metrics suggests the company is becoming more efficient.
First of all, Shake Shack's receivables turnover ratio has steadily receded in the past five years. The receivables turnover ratio measures a company's sales with respect to its account receivables, and Shake Shack's narrowing receivables turnover ratio implies that it is benefitting from fewer loose ends.
Inventory management has been a severe issue for most restaurants during the past few years as the Covid-19 pandemic and the war in Ukraine derailed global supply chains. However, Shake Shack's inventory turnover ratio indicates that the company's inventory management and cost efficiency improved during the past three years, which is a tremendous achievement. In essence, Shake Shack's hyper-growth and enhanced efficiency have coalesced, causing its profit and loss statement to align toward better days.
The current ratio is an additional metric that provides significant insight into Shake Shack's financials. Shake Shack's current ratio of 2.3 outpaces approximately 81% of its peers, meaning that the company has a liquid balance sheet, allowing it to reinvest while bearing little solvency or liquidity risk. A robust balance sheet speaks volumes as it adds appeal to investors seeking future residual value and growth.
Valuation
Shake Shack's stock is not well aligned from a valuation-based vantage point. As mentioned before, Shake Shack is operating at a loss and hosts an elevated enterprise-value-to-Ebitda ratio of 49.74. However, investors must consider that Shake Shack is still in the early stages of its business cycle, portrayed by its five-year compound annual growth rate of 20.21%.
As Shake Shack is considered a growth stock, it is more productive observing its top-line growth rates with minor emphasis on bottom-line metrics. Growth companies aim to "corner the market" and subsequently focus on cutting costs, eventually increasing investors' residual value. Thus, investors must note that Shake Shack is by no means a value stock; instead, it is a growth stock that could generally outperform the market during a risk-on environment while underperforming the market whenever risk-off sentiment is prevalent.
Final word
Paul Tudor Jones (Trades, Portfolio) has added more Shake Shack shares to his portfolio, and I find plenty of reasons to agree with this move, as the company is experiencing robust growth while increasing its operational efficiency. Moreover, a shift in the systemic environment should allow Shake Shack to reduce its costs in the coming year while its sales continue to grow exponentially.
As a growth stock, Shake Shack's stock is not producing any tangible value. However, key metrics imply that the company could soon present residual value to its shareholders.
