Investors have been going wild over Cava Group(NYSE: CAVA) stock because it debuted in the marketplace in 2023. I mean that just about literally — it’s up 174% over the past 12 months, and its valuation is thru the roof.
Although Cava has rather a lot going for it, some investors could also be waiting on the sidelines for a greater entry point. Is it finally here? Cava stock is down 25% over the past month. Let’s examine why that is happening, and whether or not that is the attractive entry point you have been waiting to see.
Cava is being touted as the following Chipotle Mexican Grill. Investors who missed out on Chipotle’s massive gains try their luck with Cava as an alternative. It has a really similar concept: fresh, healthy, premium ingredients that might be customized into all varieties of salads, bowls, and entrees. Cava serves Mediterranean food in a fast-casual setting, and its model of getting all of the ingredients prepared and prepared for personalisation, as an alternative of being cooked fresh for every customer’s order, lends itself to quick meal prep. That in turn results in satisfied customers, higher sales, and expanding margins.
Indeed, that is how it has been playing out. Sales increased 39% 12 months over 12 months within the third quarter, and net income increased from $6.8 million to $18 million. It is also benefiting from high comparable sales (comps), which were up 18.1% over last 12 months within the quarter. That is a terrific sign of customer loyalty, and it implies that Cava can replicate its success with recent restaurants over a few years.
Cava has only 352 restaurants immediately, but each is bringing in lots of sales, and average unit volume increased from $2.7 million within the second quarter to $2.8 million within the third quarter. As comps increase, each store’s fixed costs cover more sales and push the restaurant-level operating margin higher. Restaurant-level operating profit was up 42% within the quarter, and restaurant-level operating margin was 25.6%, up from 25.1% last 12 months.
Cava is growing at a reasonably slow but regular rate, with 43 stores opened in the primary nine months of 2024. Since each of its stores generates strong sales, it may amply increase its total revenue at this rate of store openings, and it has an extended runway of future growth ahead.
Those are the nice points. Now, prepare for the flip side.
Cava is young and faces a great amount of competition. Not only is it up against Chipotle, but there have been many chains entering this space, including Sweetgreen, and Brassica, a small chain Chipotle is investing in that competes directly with Cava in Mediterranean fast-casual food. 352 is a small restaurant count, and there may very well be many challenges in growing that number right into a real restaurant chain contender.
It’s already a really expensive stock, with a price-to-earnings (P/E) ratio of 245. Which means lots of the long run growth could already be built into the worth.
Nonetheless, note that the forward price/earnings-to-growth (PEG) ratio is 0.8. A PEG ratio of under 1 could suggest that the worth remains to be low-cost relative to its future earnings growth, which is why the market still sees potential for Cava stock to maintain climbing.
Wall Street is mixed on this stock. Only 44% of analysts are calling this a buy, though, which does not speak of great confidence. The median price goal is $150, which is 33% higher than it’s today, although that may be skewed by one analyst’s $195 price goal.
The drop in price seems to have began after a spate of insider selling,which could indicate that management itself sees this as a high. Nevertheless it’s not that easy, since Sweetgreen and Chipotle stocks have been falling over the identical time. Restaurant stocks often move together, like all industry. Nonetheless, it is sensible that Cava’s price is beginning to fall. It’s hard for any stock, even a young growth stock, to hold this sort of premium.
So where does this leave investors? Cava’s doing a great job at scaling profitably, and the market may not let it get too low before investors spot a chance and send it back up. It’s too expensive for my taste to purchase it even at this price, but risk-tolerant investors with a long-term horizon could make an inexpensive case for getting it on the dip.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Chipotle Mexican Grill. The Motley Idiot recommends Cava Group and Sweetgreen and recommends the next options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Idiot has a disclosure policy.