Morgan Stanley upgraded shares of Shake Shack (NYSE:SHAK) to Equal-Weight from Underweight, raising the price target to $63 from $52 in a note to clients Friday.
Analysts at the firm told investors that this week's news that SHAK has entered into a cooperation agreement with activist investor Engaged Capital offers potential operational/cost changes and greater accountability.
The agreement with Engaged Capital includes the appointment of Jeff Lawrence to the board, an additional independent board member to be determined, the retention of a consulting firm to support "operational initiatives to improve restaurant execution, cost structure and profitability," and chairman Danny Meyer and his affiliates stepping down their director designation rights over time, explained the analysts.
"We are upgrading SHAK to EW from UW, based on the prospect for margin and other tactical catalysts and improved accountability to the board for these," the analysts wrote. "To some extent, the catalysts for this agreement echo some of the fundamental concerns, mainly related to operations and profit visibility, less so brand or product, that had driven our previous UW rating on the stock."
In addition, the analysts commented on potential consumer weakness impacting SHAK's sales. They wrote: "Could sales and margins undershoot this year if there is consumer weakness, driving downside for the stock? Yes, but this would affect much of fast casual, and if SHAK can start to deliver on idiosyncratic cost drivers, it may partly offset some of these broader concerns."