Every restaurant investor is looking for the next Chipotle Mexican Grill (NYSE: CMG). The fast-casual restaurant chain has posted phenomenal returns for investors after taking its healthy Mexican fare across the U.S. The company currently has a market capitalization of $86 billion, making it one of the largest restaurant brands in the world.
The success of Chipotle has spawned a lot of fast-casual restaurant copycats. One of the most successful is Cava Group (CAVA -0.64%), which has a similar concept to Chipotle but with Mediterranean food. It is growing its restaurant count like gangbusters and went public through an initial public offering (IPO) less than a year ago.
Should you buy Cava stock for your portfolio right now?
Mediterranean fast casual? Mediterranean fast casual
Cava does build-your-own grain bowls and sandwich wraps in a similar fashion to Chipotle. But instead of Mexican food, it does Mediterranean wraps with falafel, hummus, and pita bread. In 2023, Cava locations did $2.6 million in average unit volumes (AUVs) with 24.8% restaurant-level profit margins. This novel concept seems to be resonating with customers, as foot traffic per store increased 10% year over year in 2023.
At the end of 2023, Cava had 309 restaurant units. Last year, it generated $717.1 million in revenue, up an astonishing 60% from 2022. The company is expanding rapidly with this restaurant concept, and doing so while still generating a profit. Cava Group net income was $13.9 million in 2023. It is rare to find a company growing this quickly that is also profitable, which is a great sign for investors.
Incoming national expansion
In its IPO documents, management said it thinks there is room for at least 1,000 Cava restaurant locations in the United States. Last year, it opened 72 stores, and it plans to open 50 more in 2024. If the company opens 50 restaurants each year, it will hit around 1,000 units 14 years from now. This gives the company a long runway to reinvest for growth, which is important for growth stock investors to consider.
Assuming AUVs can expand to $3 million -- a conservative estimate if you think inflation is even slightly positive -- 1,000 units should equate to $3 billion in annual sales from Cava restaurants. That would be more than 4x its 2023 sales levels, even with conservative AUV assumptions. The company began on the East Coast of the United States and now has toeholds in places like California and Colorado.
With comparable sales still strong at 11.4% in the fourth quarter of 2023, it looks like Cava's fast-casual concept is resonating around the country. This should indicate to investors that Cava can reinvest in new markets like Colorado and California with strong returns to drive revenue and earnings higher for years to come.
CAVA PS Ratio data by YCharts
The stock is not cheap
Cava has a long runway of growth ahead of it. That doesn't automatically make the stock a buy, though. Growth is just a factor in valuing a stock. The price you pay matters too.
Today, Cava has a market cap of $8.8 billion. Let's assume the company hits its $3 billion revenue target and can hit Chipotle-level profit margins of 17%. That would equate to $510 million in annual earnings on $3 billion in sales. Compared to today's market cap, that's a forward price-to-earnings ratio (P/E) of 17. This feels like a reasonable valuation for a maturing restaurant stock.
But how many years forward will these earnings show up? Eight? 10? A restaurant concept can't magically grow 1,000 new locations overnight. For this reason, I think investors are aggressively pricing in future growth at Cava. It is hard to see how shares will beat the market over the next five to 10 years unless it can greatly increase its AUVs.
Cava is a great business, but the stock looks overvalued. Investors should stay patient and keep this restaurant stock on a watchlist for now.
