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What Shake Shack can tell us about the IPO market

Shake Shack outside of the New York Stock Exchange
Spencer Platt | Getty Images
Shake Shack outside of the New York Stock Exchange

Shake Shack reported better-than-expected earnings in its fourth-quarter results, but that wasn't enough to satisfy investors.

A weak outlook for fiscal 2016 sent shares down over 10 percent in after-hours trading Monday. The NYC-based burger chain expects same-store sales at existing restaurants to rise between 2.5 and 3 percent in 2016, slightly worse than what Wall Street had been anticipating. Investors have been concerned that Shake Shack won't be able to justify its staggering valuation of 100 times earnings.

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Nevertheless, Shake Shack beat Wall Street estimates by 1 cent on the bottom line and $1 million on the top line, yet fell short of the Estimize consensus. Earnings per share of 8 cents were up from a net loss in Q4 2014, while $51 million in revenue rose 46.8 percent on a year-over-year basis. Same shack sales grew a resounding 11 percent thanks to the launch of the widely praised Chick'n Shack sandwich and nine new locations around the world.

Shake Shack's first full year as a publicly traded company was nothing short of a roller-coaster ride. After shares sold for $21 in its IPO, they soared all the way to $95 in May 2015 only to drop below $40, where they are today.

However, Shake Shack is not alone. This week, newly public companies Bojangles and El Pollo Loco are scheduled to report fourth-quarter earnings. The two companies, like Shake Shack, witnessed a huge post IPO pop only to watch shares fall face first in the following months. Despite topping expectations quarter after quarter, Shake Shack's post earnings drift sets a poor precedent for Bojangles and El Pollo Loco this Thursday.

Ahead of its first fourth-quarter earnings, early indications suggest Bojangles will beat expectations. The quick-service chicken and biscuit company currently operates 657 restaurants and is well-positioned to expand its operations in pre-existing Southeastern markets. With unit expansion growing at a 7 to 8 percent rate and low to mid single-digit same-store sales growth, Bojangles can potentially double its total restaurants. Last quarter, Bojangles reported a 23 percent earnings surprise highlighted by 18 nationwide store openings and a 4.1 percent increase in comp sales.

Bojangles' biggest threats are a heavy concentration of restaurants in the Southeast corridor and high exposure to volatile chicken prices. Currently, 39 percent of the company's sales come from breakfast which has become vulnerable to the highly promotional environment that has ensued since McDonald's introduced all-day breakfast. Bojangles is also highly leveraged and utilizes leases to finance new store openings.

The Estimize Select Consensus is calling for EPS of $1.21, 2 cents higher than Wall Street, while revenue expectations of $128.89 million are roughly in line with the Street's consensus. The Estimize community has been optimistic on Bojangles' profitability in the past three months, revising EPS estimates up 5 percent. Compared with Q4 2014, this predicts as a YoY increase on the bottom line of 6 percent while sales are looking to increase 10 percent. That might not be enough to save the chicken and biscuit company, which has seen shares fall 35.1 percent since its IPO in May 2015.

Meanwhile, El Pollo Loco, the longest tenured of the three restaurants, is coming off a year it would like to forget. Following a short-lived post-IPO surge, shares have followed a sharp downward path, falling 38.6 percent since its public debut in July 2014. Increasing food costs, rising wages and rising health concerns following the Chipotle fiasco have put pressure on the company to adapt its product mix. Unlike its peers, earnings in the last few quarters haven't wowed investors. In fact, the chicken company is coming off of two consecutive quarters of earnings misses, including relatively flat comp growth.

That being said, all is not lost with El Pollo Loco. The chicken chain is still early in its growth curve. With about 430 restaurants currently, management expects to open or remodel over 180 restaurants in the next five years. Meanwhile, LOCO reinstated combo pricing throughout its menu and increased prices slightly this past quarter, expected to propel Q4 sales

The Estimize community is calling for EPS of 14 cents and revenue expectations of $89.43 million, 10 percent higher than Wall Street on the bottom line and roughly $1.5 million greater in sales. Compared to the prior year, earnings are expected to grow 4 percent while sales remain flat. On average, El Pollo Loco beats the Estimize consensus only 40 percent of the time, but trumps Wall Street in a resounding 67 percent of reported quarters.

The allure of the IPO market has started to wear off. Investors are concerned whether newly public companies will ever live up to their high valuations. Shake Shack has been a prime example of the much larger trend. Strong earnings were unable to mask weak 2016 guidance which sent shares falling Monday. Unfortunately, this sets a disappointing stage when Bojangles and El Pollo Loco report earnings results later this week.

— Estimize is a content-sharing partner of CNBC.