Stock of the day 12/05/2015 – Barratt Developments PLC/Shake Shack Inc

Another day, another set of earnings releases and management statements as Barratt Developments PLC and Shake Shack Inc announce their latest results on Wednesday.

The housing sector was a big winner in the initial post-election aftermath, and Barratt Developments was no different ahead of its mid-week interim management statement. After a steady rise over 2014 saw the stock go from £3.47 at the start of the year to £4.70 at its end, Barratt has seen slight more robust gains in 2015. The company quickly hit a low of £4.14 in mid-January before a near uninterrupted rise between then and the start of April led it to £5.58.


(Source: IT-Finance.com 12/05/2015)

Election jitters caused a slide after this early April high; however the Conservative majority was a big boost to the housing sector, with the Tory pledges surrounding home ownership pushing Barratt around 9% from Friday to Monday, leading to an intraday high of £5.66. The post-election excitement has disappeared slightly, but Barratt is still trading at around £5.52.

The strength of long term underlying demand is the main boost for Barratt, as it is for the rest of the sector. Housing prices crept up 1% in April to an average of £193,048, the biggest rise since the summer of 2014. On top of this, the CEBR has predicted house price growth with increase from 1.5% in 2015 to 2.3% in 2016.

These rising house prices is being joined by easier avenues of borrowing from the government and lenders alike, with the former’s Help to Buy ISA plan just one example. The importance of the increase in borrowing cannot be overstated given that recent studies show that a first time buyer in London needs to earn £77,000 a year, whilst out of the capital a FTB needs £41,000 a year, both figures far above the average wage.

However there is some potential trouble on the horizon. Whilst the housing crisis is helping stocks like Barratt remain high, for all the post-Tory win gains there have been warnings from some analysts that a consistent pay out of high dividends combined with the continued failure to build enough homes could lead to a clampdown from the Conservatives. This goes someway to explaining the tentative position held by analysts, who have given Barrett Developments a consensus rating of ‘hold’ with a target price of £5.05.

Things aren’t necessarily going so well for Shake Shack Inc, despite hitting a fresh all-time high ahead of its Q1 2015 earnings release. Its IPO in mid-February saw its initial $21 offering nearly double to $40.82 at open, only for the company to high its ‘all-time’ low of $38.64 2 days later. Since then the company has seen rather rapid growth in its short life-span, reaching a high of $79.29 last week. However, that high was quickly lost as Shake Shack fell by nearly 4% on Wednesday, 12% on Thursday and another 4% on Monday (after a brief 2.75% rise on Friday), leading to a current trading price of $65.42.


(Source: IT-Finance.com 12/05/2015)

Whilst a bit of profit-taking was likely involved in Shake Shack’s post-high decline, there are also fears that the company is overpriced. These latest fears may have been inspired by the falling fortunes of Noodle & Company, which saw yet another tumble after its latest weak financial report last week. Whilst the companies do differ in some key areas, both saw perhaps overly-excited IPOs; more importantly, both at their core each offer labour-intensive products that push costs up and profit margins down, with many believing such a model is unsustainable. Shake Shack will need to prove to investors it is not going to follow the same fate as N&C and show that its methods can work in the long-term.

The company currently has only 63 restaurants in the US with an intended expansion of 10 new stores per year; not a particularly fast pace, but one that should in theory prevent the company from overstretching itself. However there are fears over Shack Shack’s growth into areas where the company isn’t as well known, with some concerned that expansion could provide a stark contrast to the success Shake Shack has seen in its native New York, where its operating profits have been much higher than those outside the Big Apple.

With analysts sceptical about Shake Shack’s high pricing, and forecasts pointing to a $0.03 per share loss on revenues of $33.9 million, the company has a consensus rating of ‘hold’ with a much lower average target price of $39.67.