Greatest Inventory to Purchase Proper Now: Dutch Bros vs. Cava

Dutch Bros (BROS -1.27%) and Cava (CAVA 0.61%) are among the many hottest client shares. Each corporations are rising stars with room to increase throughout america. Dutch Bros is disrupting a aggressive espresso panorama with its drive-through retailer mannequin, whereas Cava Group is establishing its model because the chief in Mediterranean meals.

Each shares have outperformed the broader market over the previous 19 months, however that is historical past. Which inventory is the higher purchase proper now?

I did the homework on every and in contrast their enterprise fashions, funds, and valuations to find out which inventory makes extra sense for traders at the moment.

Here’s what that you must know.

Dutch Bros might have extra enlargement potential, however Cava’s enterprise efficiency shines brighter

Each corporations function in the identical trade however have vastly totally different enterprise fashions. Dutch Bros primarily sells espresso and power drinks, which individuals typically seize and go. The corporate emphasizes small drive-through shops that may course of orders shortly. You possibly can seize a meal from a Cava retailer on the run, however meals is inherently slower to arrange, and folks typically sit and eat. Eating places additionally require kitchens, so they may want extra sq. footage and value extra to open.

Dutch Bros presently has 950 shops in comparison with Cava’s 352. Each corporations may open new shops for years, however due to its drive-through retailer mannequin, I believe Dutch Bros will in the end open extra areas. Nevertheless, Cava shines on the particular person retailer stage. The corporate has grown same-store gross sales at a double-digit price in 4 of the previous 5 quarters. In the meantime, Dutch Bros has typically produced low to mid-single-digit same-store gross sales progress over the previous two years. In different phrases, Dutch Bros is rising extra from opening new shops than Cava, which has loved a lift from sturdy same-store efficiency.

Cava’s income progress has accelerated in latest quarters whereas Dutch Bros’ has slowed:

BROS Working Income (Quarterly YoY Progress) knowledge by YCharts

Lengthy-term traders may hope Dutch Bros follows a trajectory like Starbucks. The espresso large has over 18,000 shops at the moment in North America. In the meantime, Cava resembles a fellow area of interest meals restaurant model in Chipotle Mexican Grill. Chipotle hopes to ultimately function 7,000 shops throughout North America, a a lot smaller footprint.

The excellent news is that each can work. Starbucks and Chipotle have enriched traders over time.

Cava’s financials may result in eventual share repurchases

The natural same-store progress has additionally helped Cava’s financials. The enterprise is already money flow-positive with $43 million in free money circulate over the previous 4 quarters on $913 million in income. Dutch Bros has generated virtually $1.2 billion in income however has burned $10 million in money.

The good factor for Cava is that it could possibly fund new areas organically. It owns all of its shops — and bears the prices to open and function them. The money circulate indicators the enterprise is worthwhile regardless of these progress investments, and the money circulate provides to a powerful steadiness sheet with $367 million in money and no debt. Dutch Bros has loads of money on its steadiness sheet ($281 million) but additionally already has $240 million in long-term debt.

Cava may start share repurchases within the subsequent couple of years (one other Chipotle transfer), funding its retailer enlargement whereas utilizing extra money to decrease its share rely and drive earnings per share (and the inventory worth) increased over time.

Nevertheless, Cava’s aggressive valuation complicates the conclusion

All else equal, Cava is presently the higher enterprise. It has superior same-store gross sales progress, loads of room for enlargement, sturdy money circulate, and an honest steadiness sheet.

However valuation issues, and Cava has been on an absolute heater for the reason that inventory went public. At present, Cava trades at a price-to-earnings ratio of 240. In the meantime, analysts estimate the corporate will develop earnings by a median of 30% yearly over the long run. Dutch Bros is not low cost, both; the inventory has a P/E of 172, with analysts calling for 35% annualized long-term earnings progress.

If you happen to use the PEG ratio to check every inventory’s valuation to its progress price, traders should pay much more for Cava’s progress (8.0 PEG ratio) than Dutch Bros’ (4.9).

Cava is an outstanding enterprise, however Dutch Bros isn’t any slouch. At present, Dutch Bros is the higher purchase. If Cava’s valuation sinks to a extra affordable stage, traders can be clever to leap on it. Till then, even nice corporations might be poor shares if the value is simply too excessive.