Investors are showing Cava Group a lot of love, but there may be an opportunity in another company that popularized Cava’s business model.
Wall Street loves a growth story, and Cava Group (CAVA 4.12%) is given investors just that. But the attractiveness of Cava’s stock to investors is really based on the success that Chipotle Mexican Grill (CMG 1.03%) has achieved over time. And while Cava is trading near all-time highs, Chipotle’s stock has pulled back 15% from its high-water mark.
Given these dynamics, more conservative growth investors might want to consider looking at Chipotle over Cava.
What does Chipotle (and Cava) do?
Chipotle has a Tex-Mex theme for its food products. Cava has a Mediterranean food theme. That’s the biggest difference between these two fast-casual restaurant chains. After that, they are almost carbon copies of each other.
Image source: Getty Images.
The key to each is an assembly-line-style ordering process. Customers walk down a line picking out fresh ingredients to add to their meals, which means the food is personalized and it doesn’t tend to sit around getting stale. Moreover, the food on the line is cooked in an open kitchen that customers can see behind the assembly line, further enhancing the perception of “freshness.”
Customers apparently enjoy the experience as both restaurants report strong same-store sales growth. In the third quarter of 2024, Chipotle’s same-store sales growth came in at 6% (more on this in a second). And while Cava hasn’t reported third-quarter results yet, it posted same-store sales growth of 14.4% in the second quarter. Low single digits is considered pretty good in the restaurant sector, so both of these concepts are doing relatively well.
The problem with Chipotle (and Cava)
So why is Cava’s stock at all-time highs and Chipotle’s down 15%? For starters, Chipotle is a much larger company, and its growth prospects aren’t nearly as impressive as they once were. However, Chipotle’s long history of business growth highlights just how much opportunity lies ahead for Cava. Thus, investors are flocking to Cava, thinking that it will be the next Chipotle. That may end up being true, and it is a good reason to consider the smaller restaurant chain.
However, Cava stock is currently trading at a price-to-earnings ratio of over 700! That’s a huge figure and suggests that investors are pricing in a lot of good news. Chipotle’s P/E ratio is a more modest 53. That’s kind of high, too, but is actually below the five-year average of 74.
So Chipotle is relatively cheap compared to Cava and to its own recent history. There are multiple reasons. For starters, the company’s highly respected CEO just left to run another company. That has investors worried about the business.
This was made worse by the third quarter’s same-store sales growth of “just” 6%. While 6% growth in the same-store sales metric is pretty strong in the restaurant industry, it was down from Chipotle’s second-quarter growth of 11.1%.
It seems like investors are worried that Chipotle has lost its way. It was unfortunate that the company’s CEO took off, but there was a team supporting the CEO. That team is largely still in place, and it will likely be able to guide the company along just fine.
And the drop in same-store sales was inevitable. An 11.1% same-store sales growth rate is simply not sustainable. A 6% same-store sales growth rate from a restaurant brand the size of Chipotle is still very impressive and hints that, despite the CEO’s departure, the company hasn’t lost its way.
Drawdowns happen to every company
Here’s the thing: Nothing goes in a straight line on Wall Street. Chipotle’s stock has pulled back multiple times over its history, only to rise again to new all-time highs. The fact is that customers like Chipotle’s food, and while demand may ebb and flow in any given period, over the long term, a strong food concept that is still opening new locations (86 were opened in the third quarter) is probably the kind of business that you’d want to buy while it appeared to be on sale.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
