Traders have been going wild over Cava Group(NYSE: CAVA) inventory because it debuted available on the market in 2023. I imply that nearly actually — it is up 174% over the previous yr, and its valuation is thru the roof.
Though Cava has lots 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.
Cava is being touted as the subsequent Chipotle Mexican Grill. Traders who missed out on Chipotle’s huge good points are attempting their luck with Cava as an alternative. It has a really related idea: recent, wholesome, premium components that may be personalized 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 personalization, as an alternative of being cooked recent for every buyer’s order, lends itself to fast meal prep. That in flip results in happy prospects, greater gross sales, and increasing margins.
Certainly, that is the way it’s been taking part in out. Gross sales elevated 39% yr over yr within the third quarter, and web earnings elevated from $6.8 million to $18 million. It is also benefiting from excessive comparable gross sales (comps), which had been up 18.1% over final yr within the quarter. That is an amazing 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 every one 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 enhance, 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 gradual however regular fee, with 43 shops opened within the first 9 months of 2024. Since every of its shops generates robust gross sales, it may amply enhance its whole income at this fee of retailer openings, and it has a protracted runway of future development forward.
These are the great factors. Now, prepare for the flip facet.
Cava is younger and faces an excellent quantity of competitors. Not solely is it up in opposition to Chipotle, however there have been many chains coming into this house, together with Sweetgreen, and Brassica, a small chain Chipotle is investing in that competes instantly with Cava in Mediterranean fast-casual meals. 352 is a small restaurant depend, 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 longer term development may already be constructed into the worth.
CAVA PE Ratio information by YCharts. PS = price-to-sales.
Nonetheless, observe that the ahead worth/earnings-to-growth (PEG) ratio is 0.8. A PEG ratio of below 1 may counsel that the worth remains to be low cost relative to its future earnings development, which is why the market nonetheless sees potential for Cava inventory to maintain climbing.
Wall Avenue is combined on this inventory. Solely 44% of analysts are calling this a purchase, although, which does not converse of nice confidence. The median worth goal is $150, which is 33% greater than it’s in the present day, though that is perhaps skewed by one analyst’s $195 worth goal.
The drop in worth appears to have began after a spate of insider promoting,which may 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 all business. Nonetheless, it is sensible that Cava’s worth is beginning to fall. It is onerous for any inventory, even a younger development inventory, to hold this type of premium.
So the place does this go away traders? Cava’s doing an excellent 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 worth, however risk-tolerant traders with a long-term horizon may make an affordable case for getting it on the dip.
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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: brief December 2024 $54 places on Chipotle Mexican Grill. The Motley Idiot has a disclosure coverage.
Cava Inventory Is Down 25% Over the Previous Month. Is It Time to Purchase? was initially revealed by The Motley Idiot
