×

Why Cramer is salivating for Shake Shack's IPO

Last week Jim Cramer gave the go-ahead for investors to get in on the Box IPO, and it was a big hit, just as he predicted. Now he's got the IPO for Shake Shack in mind, and he is chomping at the bit to get in on it.

The "Mad Money" host doesn't play around when it comes to hamburgers. In fact, perhaps McDonald's should listen to this one.

Why does Cramer want to gobble up Shake Shack?

Pedestrians pass a Shake Shack location in New York City.
Scott Mlyn | CNBC
Pedestrians pass a Shake Shack location in New York City.

First, is the potential for growth. Currently, it has 63 locations, and only 36 of those are in the U.S. Ultimately, it believes it can open 450 locations, just in the U.S. alone. That is an unbelievable growth trajectory.

Wall Street wants a piece of it, too. Historically speaking, the IPO market loves the young, fast-growing restaurant chains. Just look at Zoe's Kitchen, which went public last April, shot up 65 percent on the first day of trading and has added another 24 percent since then.

"If Shake Shack is anything like those deals, and honestly, I think it's a better company, then it's likely to roar right out of the gate," Cramer added.

The proposed stock price for the burger joint is the $14 to $16 price range, which gives the company a valuation of $533 million. Looking at the numbers, in 2013 average unit volumes were $5 million. That is more than twice the $2.2 million that Chipotle generates.

Additionally, Shake Shack's business model is one that creates an upside predictability for domestic investors. All but two international locations are franchises, whereas U.S. locations are all company owned. This way it has growth overseas without the risk.

According to Cramer, there are two areas where Shake Shack appears to lag. That is with its margins and same-store sales. However, he thinks that deficit is because almost half of the company's locations have been opened within the past year. Thus, he thinks this is not a long-term concern.

How to value a stock like Shake Shack?

Cramer has a hard time valuing it, considering that it is putting almost all of its profits back into the business. So the current earnings don't tell investors much, though when sales at the mid-point of its proposed price range are taken into consideration, that would value it at 2.5 times forward sales.

According to the "Mad Money" host, the best way to judge this stock is by how much money it could earn in the long term.

"I have to believe the earnings power four or five years from now could be ultimately enormous," he said.

----------------------------------------------------------
Read more from Mad Money with Jim Cramer
Cramer Remix: Leaders for a market win
Cramer: UPS & McD's are totally wrong
Cramer's game plan: Alibaba's surprise
----------------------------------------------------------

In Cramer's opinion, this deal is programmed to be a winner right out of the gate. However, if investors are unable to get in on the IPO, don't pay more than $20 in the aftermarket.

"Given the volatile nature of this market, if you can't get a piece of the Shake Shack IPO, you might want to wait for a broad-based, marketwide pullback to give you a better entry point."

Questions for Cramer?
Call Cramer: 1-800-743-CNBC

Want to take a deep dive into Cramer's world? Hit him up!
Mad Money Twitter - Jim Cramer Twitter - Facebook - Instagram - Vine

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com