Starboard takes a bite out of Shake Shack, says company is worth double

Starboard Value, the activist investment fund with a history in the food sector, has purchased a stake in Shake Shack and wants to influence the burger chain's strategy after its stock fell 36% in the last 12 months. Starboard CEO Jeff Smith told Bloomberg that the stake is worth "several hundred million dollars" and that Shake Shack's market value should be double its current level. The company is currently worth $3 billion on the stock exchange.

Shake Shack is currently trading at around 10x EBITDA, but "the multiple should be double, because the company is growing mid-teens, it's one of the fastest-growing in the sector, and it has quality," Smith said. In his opinion, the current valuation "doesn't make sense".

After Starboard's announcement on Wednesday, the stock closed up 12% - also influenced by the company's second-quarter results, which showed a 17% increase in revenue driven by increased traffic in stores. Smith said the strategy for Shake Shack in the US is to focus on opening new franchisees. According to the executive, the company already knows how to work with operators abroad without losing product quality.

Shake Shack plans to open around 65 company-owned restaurants this year in the US, with a goal of reaching 1,500 total stores (including franchises). "We want them to increase franchising in the US, in addition to continuing to expand company-owned stores," Smith told Bloomberg. "If they do that, we think it can make a significant difference in their growth rate."

Starboard has a history of changing the course of large food companies in the US. The fund was one of the main drivers behind the revival of Olive Garden and Papa Johns Pizza chains. In fact, Starboard and Shake Shack CEO Rob Lynch are old acquaintances. It was Smith who hired Lynch to be CEO of Papa Johns when Smith was chairman of the pizza chain.

Starboard also has stakes in Dynatrace, CarMax, Lamb Weston Holdings, and Riot Platforms. The Shake Shack stock is trading sideways today, priced at $70.70. The 52-week high was $111.76, and the low was $51.60.