Traders have been going wild over Cava Group (CAVA -1.39%) inventory because it debuted in the marketplace in 2023. I imply that just about actually — it is up 174% over the previous yr, and its valuation is thru the roof.
Though Cava has so much going for it, some traders could also be ready on the sidelines for a greater entry level. Is it lastly right here? Cava inventory is down 25% over the previous month. Let’s have a look at why that is occurring, and whether or not or not that is the engaging entry level you’ve got been ready to see.
Why the market goes for Cava
Cava is being touted as the following Chipotle Mexican Grill. Traders who missed out on Chipotle’s huge beneficial properties are attempting their luck with Cava as a substitute. It has a really related idea: contemporary, wholesome, premium components that may be custom-made into all kinds of salads, bowls, and entrees. Cava serves Mediterranean meals in a fast-casual setting, and its mannequin of getting all of the components ready and prepared for personalisation, as a substitute of being cooked contemporary for every buyer’s order, lends itself to fast meal prep. That in flip results in glad clients, greater gross sales, and increasing margins.
Certainly, that is the way it’s been enjoying out. Gross sales elevated 39% yr over yr within the third quarter, and internet earnings elevated from $6.8 million to $18 million. It is also benefiting from excessive comparable gross sales (comps), which have been up 18.1% over final yr within the quarter. That is a fantastic signal of buyer loyalty, and it implies that Cava can replicate its success with new eating places over a few years.
Cava has solely 352 eating places proper now, however each is bringing in a variety of gross sales, and common unit quantity elevated from $2.7 million within the second quarter to $2.8 million within the third quarter. As comps improve, every retailer’s mounted prices cowl extra gross sales and push the restaurant-level working margin greater. Restaurant-level working revenue was up 42% within the quarter, and restaurant-level working margin was 25.6%, up from 25.1% final yr.
Cava is rising at a reasonably sluggish however regular charge, with 43 shops opened within the first 9 months of 2024. Since every of its shops generates sturdy gross sales, it might probably amply improve its complete income at this charge of retailer openings, and it has an extended runway of future progress forward.
The valuation is not holding
These are the great factors. Now, prepare for the flip aspect.
Cava is younger and faces quantity of competitors. Not solely is it up in opposition to Chipotle, however there have been many chains getting into this area, together with Sweetgreen, and Brassica, a small chain Chipotle is investing in that competes straight with Cava in Mediterranean fast-casual meals. 352 is a small restaurant rely, and there could possibly be many challenges in rising that quantity into an actual restaurant chain contender.
It is already a really costly inventory, with a price-to-earnings (P/E) ratio of 245. Meaning a variety of the long run progress might already be constructed into the worth.
CAVA PE Ratio knowledge by YCharts. PS = price-to-sales.
Nevertheless, word that the ahead value/earnings-to-growth (PEG) ratio is 0.8. A PEG ratio of underneath 1 might counsel that the worth continues to be low-cost relative to its future earnings progress, which is why the market nonetheless sees potential for Cava inventory to maintain climbing.
Wall Road is combined on this inventory. Solely 44% of analysts are calling this a purchase, although, which does not converse of nice confidence. The median value goal is $150, which is 33% greater than it’s at this time, though that may be skewed by one analyst’s $195 value goal.
The drop in value appears to have began after a spate of insider promoting,which might point out that administration itself sees this as a excessive. However it’s not that easy, since Sweetgreen and Chipotle shares have been falling over the identical time. Restaurant shares typically transfer collectively, like several trade. Nevertheless, it is sensible that Cava’s value is beginning to fall. It is arduous for any inventory, even a younger progress inventory, to hold this sort of premium.
So the place does this depart traders? Cava’s doing job at scaling profitably, and the market might not let it get too low earlier than traders spot a chance and ship it again up. It is too costly for my style to purchase it even at this value, however risk-tolerant traders with a long-term horizon might make an inexpensive case for getting it on the dip.
Jennifer Saibil has no place in any of the shares talked about. The Motley Idiot has positions in and recommends Chipotle Mexican Grill. The Motley Idiot recommends Cava Group and Sweetgreen and recommends the next choices: quick December 2024 $54 places on Chipotle Mexican Grill. The Motley Idiot has a disclosure coverage.
