There's a better alternative to Shake Shack that Wall Street is ignoring

Shake Shack shares are finally falling, it’s time for investors to look to less over-hyped options. Prime among these: Sonic Drive-In.
Sonic Drive-In is the fourth-largest burger chain in the US, after McDonald’s, Burger King, and Wendy’s, with $4 billion in sales in 2015.

The carhop chain is often left out of the national discussion of the fast-food industry, in part because Sonic isn’t quite like any other chain around.

Sonic’s preformance has been lukewarm over the last year, with shares trading at $30.70 after the market closed Tuesday. However, due to the chain’s particular strengths and the culmination of the fast-casual IPO craze, now could be the time for Sonic to shine.

Here’s why investors should ditch their overpriced Shake Shack stocks and look into investing in Sonic.

1. It’s huge — and growing

Shake Shack literally has 1% of the number of Sonic’s locations in the US — 1.4% if we’re being generous. However, the two companies’ market capitalizations aren’t far off: Shake Shack’s market cap is $1.37 billion, while Sonic’s is $1.53 billion.

That means that each Shake Shack location is valued at more than $20 million. That’s not as much as it was a little less than a year ago, when the market cap was higher and a single location was worth nearly $50 million.

However, it’s a fair bit more than Sonic, where each location is valued about about $437,000 using the same formula. This is despite the fact that Sonic’s average unit volume was more than $1 million in 2010.

The drive-in chain is currently expanding, announcing in 2014 plans to open 1,000 new locations in the next decade.

“We see an opportunity to grow not only in our core markets, like Texas and Oklahoma and Kansas, but also in newer markets, like the Northeast and the Northwest,” Sonic’s chief development/strategy officer, John Budd told Business Insider.

2. Other chains are stealing its ideas

Two of the biggest recent innovations in the fast-food game have been McDonald’s all-day breakfast and Burger King’s grilled hot dog — both menu mainstays at Sonic.

Sonic sells an estimated one in seven of all hot dogs in the US.

“We’ve been in this space for quite a long time,” says Budd. “Because of its price point, because of its portion size, [the hot dog] is something that can really appeal to consumers both as snacks and meal times. So we think that’s part of the reason it’s surfacing right now.”

All-day breakfast is similarly appealing, to both Sonic and now McDonald’s customers. Sonic has emphasised the all-day breakfast platform as part of its menu’s breadth for years. Now, a very similar platform is helping McDonald’s turn business around.

3. It has a business model unlike any other

While Burger King and McDonald’s are taking lessons from Sonic, the chain’s business model is inimitable.

Shake Shack may be attracting fast casual (or, to use the company’s term, fine casual) copy cats in cities stuffed full of foodies, but Sonic has a business model that thrives outside of urban centres.

The drive-in model allows Sonic to have a broader menu than fast-food competitors, including 1.3 million drink combinations. It also has the benefit of making greater personalisation even more achievable.

“A lot of times if you pull up to a drive-thru and you’re trying to contemplate the menu, we find that consumers feel stressed out by a line building up behind them,” says Budd. “There’s probably a psychological term for that that I’m not aware of. [At Sonic], you can come in and take your time.”

A drive-in chain is never going to thrive in cities where space is tight and cars are underutilized. However, in most of the US, transportation still revolves around cars, with more than 85% of Americans driving to work. Plus, current low gas prices are helping drive customer to Sonic locations, along with other fast-food restaurants.

Let’s be real: Wall Street investors are more likely to live in New York City, take a train or subway to work, and eat Shake Shack than the average American. The fine-casual burger chain fits perfectly into their daily life.

However, Sonic is a fast-food chain that’s killing it by sticking to its roots. Now, it’s up to investors to pay attention.

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