The market has been throughout Cava Group (CAVA -9.00%) inventory because it debuted as a public firm in early 2023. It is up 122% over the previous 12 months, however it is likely to be dropping steam. Traders is likely to be cautious about simply how good its earnings outcomes are going to be when it stories on Feb. 25, particularly contemplating how a lot progress is already constructed into its inventory value. With the worth transferring down as we get nearer, do you have to purchase earlier than the discharge?
Why the market loves Cava
Cava is among the newer fast-casual restaurant chains which have stormed the markets in recent times. They’re all aiming to mimic the success of Chipotle Mexican Grill, one of many unique fast-casual ideas, and one which has delivered unbelievable positive factors for traders.
Like Chipotle, Cava’s mannequin contains recent, premium fare, with a restricted variety of substances which can be straightforward to arrange however will be custom-made into many various dishes. Cava’s idea facilities round a Mediterranean menu. Its value level is greater than commonplace quick meals like McDonald’s, however decrease than positive eating, and that appeals to an prosperous clientele even in an inflationary local weather.
The chain has been taking off. It solely operated 352 shops as of the tip of the third quarter, however the plan was for about 57 new shops in 2024, and it thinks it will probably attain about 1,000 shops by 2030. That ought to generate regular progress over the following 5 years, however it’s nonetheless manner under Chipotle’s present retailer depend of three,700, and it may proceed to develop at a wholesome tempo after 2030.
It isn’t simply retailer progress and gross sales progress which have been spectacular. It is reporting greater comparable gross sales, which implies individuals are coming again for extra. It has additionally been reporting optimistic web revenue since its first quarter as a public firm, and it is rising.
In Q3, whole income elevated 39% 12 months over 12 months, and comparable gross sales elevated 18%, which is an outstanding exhibiting. Restaurant-level revenue margin elevated from 25.1% to 25.6%, and web revenue climbed from $6.8 million to $18 million. Administration raised its outlook for the fourth quarter to about 12.5% comparable gross sales progress and 24.5% to 25% restaurant-level revenue margin.
Dangers to pay attention to
Cava inventory has been falling over the previous two weeks, which is not uncommon earlier than an earnings report, particularly when there’s been a whole lot of momentum. Nonetheless, there are different elements that might be influencing the inventory drop, equivalent to worries about financial coverage.
That highlights the dangers of investing in a younger firm with a excessive valuation. In addition to Cava is doing proper now, it is nonetheless a reasonably small firm, and shopping for now’s a vote of confidence in what it will probably turn into. Rising an organization to triple its measurement requires a sure ability set. It is also dealing with competitors from many new fast-casual chains, and from Chipotle itself.
As for valuation, Cava trades at a ahead, one-year price-to-earnings (P/E) ratio of 134, which is astronomical, particularly for a non-tech firm. Though the market is not essentially affordable, at this value, the near-term upside does not look so excessive.
Is now the time to purchase?
If Cava releases one other flawless report on Feb. 25, the inventory is more likely to bounce. But when there’s something disappointing, equivalent to an earnings miss or mediocre outlook, the inventory is more likely to drop. There’s a whole lot of confidence wrapped up in such a excessive valuation.
I believe that Cava has a brilliant future, and over the following 5 to 10 years, it ought to sustain regular and powerful progress. When you have that point to carry, it will not matter an excessive amount of if you happen to purchase as we speak or after the earnings report; you may’t time the market. Nonetheless, I might warning shopping for at this value, as a result of there are a whole lot of excessive expectations constructed into it. I like to recommend ready for a extra engaging entry level. Another choice when the potential appears good however the value is excessive is to make use of a dollar-cost averaging technique to construct a place over time.
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 recommends the next choices: brief March 2025 $58 calls on Chipotle Mexican Grill. The Motley Idiot has a disclosure coverage.
