Is Sonic a Better Investment Than Shake Shack's IPO?
The chain of more than 3,500 drive-in restaurants posted blowout quarterly results. Revenue moved higher for the fiscal first quarter that ended in November, fueled by an 8.5 percent spike in comparable-restaurant sales. Keep in mind that burger-flipping bellwether McDonald's (MCD) posted negative comps in each of the three months that make up Sonic's report.
Earnings excluding a one-time tax benefit a year earlier soared 38 percent to top $10 million or 18 cents a share. Analysts were only holding out for a profit of 16 cents a share, but that's not much of a surprise: Sonic has topped Wall Street's earnings forecasts in three of the past four quarters.
The strong report was enough to send Sonic shares up to an all-time high in after-hours trading on Tuesday. Given the challenges at McDonald's, it's comforting to know that you can still carve out a cozy living serving up cheap burgers and shakes. We'll soon find out if it pays to serve up pricier fare.
Investors hoping for a chance to buy into West Coast darling In-N-Out or East Coast darling Five Guys will have to settle for the smaller yet equally cult-followed Shake Shack.
True to its name, Shake Shack serves up shakes and other frozen custard-based treats. However, it's just as famous for its burgers. The first location opened in the heart of New York City's Madison Square Park 10 years ago, but the concept's growing up in a hurry.
Shake Shack has seen its store count triple to 63 today from 21 at the end of 2012. You won't find too many chains tripling in two years, and naturally Shake Shack's going to hit the market with some impressive top-line growth.
The average Shake Shack rings up an impressive $5 million a year. Back out the frenzied Manhattan locations, and the average unit volume is still an impressive $3.8 million.
Shake Shack is profitable, though margins have contracted since peaking two years ago. This isn't necessarily problematic. The chain is expanding aggressively, and it's worth noting that 27 of its locations are licensed internationally.
Shake It Up
Given Shake Shack's healthy growth, strong unit-level economics, and ample expansion potential, it's going to be a hot IPO. There are plenty of fans of the chain's chilly treats, Angus beef burgers and original flat-top hot dogs, but the stock should attract an even larger following.
That could be dangerous. We still don't have any pricing information on the IPO. It isn't likely to be cheap, and that's before investors bid it up at the open when it likely begins trading in a few weeks. It's at a time like this that investors may want to warm up to Sonic instead. Yes, Sonic isn't cheap: It's now trading at nearly 30 times this fiscal year's projected earnings. However, it has proven itself as a public company. Sure, it's not expanding as quickly as Shake Shack. It can't, given its already large presence. However, with Shake Shack's comparable-restaurant sales growth decelerating from 7.1 percent in 2012 to 5.9 percent in 2013 to just 3 percent through the first nine months of fiscal 2014, it frames the monster quarter that Sonic just reported as a pretty meaty achievement.
There's no point in chasing Shake Shack when Sonic is right there in all of its retro drive-in splendor. It's parked right in front of you.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends McDonald's. Try any of our Foolish newsletter services free for 30 days. Check out The Motley Fool's one great stock to buy for 2015 and beyond.