Investors went crazy Cava group(NYSE: CAVA) stock since it debuted on the market in 2023. I mean that almost literally — it’s up 174% over the past year, and its valuation is through the roof.
While Cava has a lot going for it, some investors may be waiting on the sidelines for a better entry point. Is it finally here? Cava shares have fallen 25% over the past month. Let’s take a look at why this is happening and whether or not this is the attractive entry point you’ve been waiting to see.
Cava is advertised as follows Chipotle Mexican Grill. Investors who missed out on Chipotle’s huge gains are trying their luck with Cava instead. It has a very similar concept: fresh, healthy, premium ingredients that can be adapted into all kinds of salads, bowls and appetizers. Cava serves Mediterranean food in a fast-casual environment, and its model of having all the ingredients prepared and ready to adjust, rather than being cooked fresh for each customer’s order, lends itself to quick meal preparation. This in turn leads to satisfied customers, higher sales and increased margins.
Indeed, that is how it unfolded. Third-quarter sales rose 39% year-over-year, with net income rising from $6.8 million to $18 million. It also benefited from strong comparable sales (comps), which rose 18.1% year-over-year in the quarter. This is a great sign of customer loyalty and implies that Cava can repeat its success with new restaurants for many years to come.
Cava currently has just 352 restaurants, but each is generating strong sales, with average unit volume rising from $2.7 million in the second quarter to $2.8 million in the third quarter. As revenues increase, each store’s fixed costs cover more sales and push to the restaurant level operating margin higher. Restaurant-level operating profit increased 42% in the quarter, and restaurant-level operating margin was 25.6%, compared to 25.1% last year.
Cava is growing at a fairly slow but steady rate, with 43 stores opening in the first nine months of 2024. With each of its stores generating strong sales, it can significantly increase its overall revenue at this rate of store openings, and has a long path of future growth ahead.
Those are the good sides. Now get ready for the other side.
Cava is young and faces a lot of competition. Not only is it at odds with Chipotle, but many chains have entered this space, including Sweetgreenand Brassica, a small Chipotle-invested chain that competes directly with Cava in Mediterranean fast-casual food. 352 is the number of small restaurants and there could be many challenges in growing that number into a real restaurant chain candidate.
It is already a very expensive stock, with a price-to-earnings ratio (P/E) ratio of 245. This means that much of the future growth could already be built into the price.
However, note that the forward price/earnings growth (PEG) ratio is 0.8. A PEG ratio of less than 1 could suggest that the price is still low relative to future earnings growth, which is why the market still sees potential for continued growth in Cave stock.
Wall Street is mixed on this stock. Still, only 44% of analysts call this a buy, which doesn’t speak to much confidence. The average price target is $150, which is 33% higher than today, although that could be skewed by one analyst’s $195 price target.
The price drop seems to have started after a series of insider sales, which could mean that management itself sees it as a high price. But it’s not that simple, as Sweetgreen and Chipotle’s stock has been falling at the same time. Restaurant stocks often move together, just like any other industry. But it is logical that the price of Cava is starting to fall. It is difficult for any stock, even a young stock, to carry this kind of premium.
So where does this leave investors? Cava is doing a good job of scaling profitably, and the market may not let it fall too low before investors see an opportunity and send it back. It’s too expensive for my taste to buy even at this price, but risk-tolerant investors with a long-term horizon could make a reasonable case for buying at a lower level.
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Jennifer Saibil has no position in any of the listed stocks. The Motley Fool has positions and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and Sweetgreen and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
