Investors were going wild Cava group(NYSE: CAVA) The stock since its market debut in 2023. I mean that almost literally — it’s up 174% over the past year, and its valuation has reached all-time highs.
Although Cava has a lot going for it, some investors may wait on the sidelines for a better entry point. Is he finally here? Cava stock is down 25% over the past month. Let’s see why this is the case, and whether or not this is the attractive entry point you’ve been waiting to see.
Cava is being touted as next Chipotle Mexican Grill. Investors who missed out on Chipotle’s massive gains are trying their luck with Cava instead. It has a very similar concept: fresh, healthy, premium ingredients that can be customized into all kinds of salads, bowls and entrees. Cava serves Mediterranean food in a fast casual setting, and its model of having all ingredients prepared and ready for customization, rather than cooked fresh to each customer’s order, lends itself to quick meal preparation. This in turn leads to customer satisfaction, increased sales, and expanded profit margins.
In fact, that’s how things used to go. Sales rose 39% year over year in the third quarter, and net income rose from $6.8 million to $18 million. It’s also benefiting from higher comparable sales, which were up 18.1% year over year in the quarter. This is a great sign of customer loyalty, and means Cava can replicate its success with new restaurants over many years.
Cava only has 352 restaurants right now, but each restaurant is generating a lot of sales, and average unit size increased from $2.7 million in the second quarter to $2.8 million in the third quarter. As businesses increase, the fixed costs per store cover more sales and raise the bar for the restaurant Operating margin higher. Restaurant operating profit increased 42% in the quarter, and restaurant operating margin reached 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. Since each of its stores is generating strong sales, it can significantly increase its overall revenue at this rate of store openings, and has a long runway for future growth in the future.
Those are the good points. Now, get ready for the other side.
Cava is young and faces a lot of competition. Not only is it taking on Chipotle, there have been several chains entering this space, including… Sweet greenand Brassica, a small chain invested in by Chipotle that competes directly with Cava in fast-casual in the Mediterranean. 352 is a small number of restaurants, and there may be many challenges in growing this number to become a true competitor to a chain restaurant.
It’s already a very expensive stock, with a price-to-earnings ratio Price to Earnings Ratio. From 245. This means that a lot of future growth can already be built into the price.
However, note that the forward price/earnings to growth (PEG) ratio is 0.8. A PEG ratio of less than 1 can indicate that the price is still cheap compared to its future earnings growth, which is why the market still sees the potential for Cava stock to continue rising.
Wall Street has mixed performance on this stock. However, only 44% of analysts describe this as a buy, which does not indicate much confidence. The average price target is $150, which is 33% higher than where it is today, although that may deviate from one analyst’s price target of $195.
The decline in prices appears to have started after a wave of insider selling, which may indicate that management itself sees this price as high. But it’s not that simple, as shares of Sweetgreen and Chipotle were falling at the same time. Restaurant stocks often move together, like any industry. However, it stands to reason that the price of Cava is starting to decline. It’s hard for any stock, even emerging stocks, to carry that kind of premium.
So, where does this leave investors? Cava is doing a good job of expanding profitably, and the market may not let it fall too low before investors spot the opportunity and send it back higher. It’s too expensive for me to buy even at this price, but risk-tolerant investors with a long-term horizon can make a reasonable case for buying it on the dip.
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Jennifer Seibel He has no position in any of the stocks mentioned. The Motley Fool enjoys and recommends locations at Chipotle Mexican Grill. The Motley Fool recommends Cava Group and Sweetgreen and recommends the following options: December 2024 $54 Short Offer on Chipotle Mexican Grill. The Motley Fool has Disclosure policy.
