Cava Group (CAVA 0.70%) inventory was a breakout winner final yr because the market cap of the Mediterranean fast-casual restaurant chain greater than doubled on blistering progress. The numbers the corporate is producing proper now are paying homage to Chipotle Mexican Grill, the chief and pioneer in quick informal, and Cava’s common unit volumes, or common gross sales per restaurant, are already approaching Chipotle ranges.
Nonetheless, after hovering by most of 2024, Cava’s inventory worth pulled again following the discharge of its third-quarter earnings report in mid-November, seemingly because of valuation considerations as its outcomes have been sturdy. Even after a rebound this month, the inventory trades down 17% from its earlier peak.
On one stage, the inventory does look costly, buying and selling at a price-to-earnings ratio above 200, however should you take a better have a look at the numbers, you would possibly discover that Cava is not fairly as costly as you thought. As you possibly can see from the chart beneath, analysts have quickly revised their earnings estimates greater for the corporate, displaying they’ve persistently underestimated it.
Knowledge by YCharts.
Analysts’ consensus forecasts for 2024’s earnings tripled over the course of the yr, and so they could possibly be underestimating the inventory going into 2025 as properly. The consensus name for 2025 is that earnings per share will rise from $0.50 to $0.64.
If Cava continues to ship sturdy comparable gross sales progress — comps have been up 18.1% within the third quarter — and continues to open new eating places, it is more likely to prime that forecast.
Nonetheless, there’s one more reason that Cava inventory is not as costly as it would look. The chain remains to be small, with simply 352 areas as of the tip of the third quarter. Examine that to Chipotle’s greater than 3,000 areas. Cava is aiming to have greater than 1,000 eating places open by the tip of the last decade, however the chain might develop properly past that over the long run.
Given its current outcomes, there seems to be lots of room for progress forward, and revenue margins ought to broaden as its operations scale up. There’s extra to the Cava story than a excessive share worth.
Jeremy Bowman has positions in Chipotle Mexican Grill. The Motley Idiot has positions in and recommends Chipotle Mexican Grill. The Motley Idiot recommends Cava Group and recommends the next choices: brief March 2025 $58 calls on Chipotle Mexican Grill. The Motley Idiot has a disclosure coverage.
