Bank of America analysts must have gotten a little peckish while writing their reports this week.
The firm initiated coverage of Shake Shack (NYSE:SHAK), Wingstop (NASDAQ:WING) and Jack in the Box Inc (NASDAQ:JACK), while reinstating its coverage of Cheesecake Factory Inc. (NASDAQ:CAKE).
Here’s what the analysts had to say about whether these companies should be a part of your securities diet:
Shake Shack (NYSE:SHAK)
Shake Shack (NYSE:SHAK) earned a Neutral rating and a $66 price target, compared to a Friday morning trading price of $56.14.
The regional burger chain has benefitted from a reopening bump and higher prices, which the analysts expect to revert somewhat over the coming quarters. Longer term, the firm is optimistic about the company’s growth in terms of total stores.
The “consensus growth outlook is achievable but not conservative,” analysts wrote. “Extrapolating from densities in tenured markets in Colorado and Florida, the US store potential is 860-890, roughly 2x the ‘at least 450’ target cited in its 2015 S-1, but consistent with the Street's view for 14% CAGR through 2026.”
Internationally, Shake Shack (NYSE:SHAK)’s model density of 1.5 stores per million people suggests 3,000 restaurants in existing markets, the analysts noted.
“But given the densest markets are in the Middle East -- a region uniquely favorable to higher price point American concepts and one that plays an outsized role in international development for casual innings restaurants — we believe South Korea's density of 0.4 per million may be more relevant.”
Wingstop (NASDAQ:WING)
Wingstop (NASDAQ:WING) is “spreading its wings but long-term targets are conservative,” BofA analysts said, meriting a Buy rating and $225 price target. Shares of Wingstop (NASDAQ:WING) traded at $175.47 Friday morning.
The positive outlook starts with a strong category.
“The chicken limited-service restaurant segment has outpaced every other LSR category, with WING taking market share within the segment,” analysts wrote. “...its 12% 5-year CAGR has outpaced every other segment.”
“[T]he company's systemwide sales have grown faster still — 20% CAGR-on the back of ~40 basis points of market share gain annually since 2013. With only 6% share, WING should continue to outpace the segment,” they added.
Jack in the Box
Jack in the Box also earned a Buy rating, along with a price target of $85. Shares of the eclectic quick-service restaurant traded at $63.99 Friday morning.
BofA analysts pointed to the company’s new data-driven approach as a means of unlocking new revenue and margin opportunities.
“Since CEO Darin Harris joined in 2020, JACK has applied a systematic approach...” analysts wrote. “Guest insights inform Jack in the Box's new beverages and broader innovation. Operations initiatives — training, extended hours, dining room reopening — are converting traffic drivers into sales. Supply chain synergies, new equipment, and process optimization target 200 basis points of restaurant margin and are to date, only 50% deployed.”
“This data-driven approach has translated into higher restaurant volumes and structurally higher franchisee returns, the linchpin of unit growth,” they added.
Additionally, BofA noted that since 2021, franchisees have signed agreements for 340 new Jack in the Box restaurants (15% of the system) and 153 new Del Taco restaurants (26% of the system).
The Cheesecake Factory
The Cheesecake Factory was reinstated with a Neutral rating and $33 price target, compared to its Friday morning price of $28.78.
The big question for the Cheesecake Factory is perhaps the growth of its other brands, North Italia and Fox Restaurant Concepts. The brands will face immense margin pressure as they work to build scale, the analysts said.
“The company's namesake brand, The Cheesecake Factory, is roughly two-thirds of the way to saturation (211 restaurants vs 300 target),” the analysts wrote. “To reinvigorate growth, the company is accelerating the development of its new brands: North Italia and Fox Restaurant Concepts (FRC), a collection of 12 eateries with distinct cuisines.”
They continued: “While CAKE is targeting higher returns for those businesses (~30% ROI vs ~20% for its eponymous brand), margins are being pressured near-term by the longer maturity curve (new units take 3-4 years to fully leverage costs).”
The restaurants will also face topline growth risk from slower consumer spending and untested brand portability, the analysts noted.
Even so, “North Italia and FRC compose over half of CAKE's new unit growth over the next 3 years,” the analysts said.
Contact Andrew Kessel at andrew.kessel@proactiveinvestors.com
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