The market has been throughout Cava Group (NYSE: CAVA) inventory because it debuted as a public firm in early 2023. It is up 122% over the previous yr, but it surely is likely to be shedding steam. Buyers is likely to be cautious about simply how good its earnings outcomes are going to be when it studies on Feb. 25, particularly contemplating how a lot development is already constructed into its inventory worth. 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 lately. They’re all aiming to mimic the success of Chipotle Mexican Grill, one of many authentic fast-casual ideas, and one which has delivered unimaginable positive factors for buyers.
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Like Chipotle, Cava’s mannequin contains contemporary, premium fare, with a restricted variety of substances which can be simple to organize however might be custom-made into many alternative dishes. Cava’s idea facilities round a Mediterranean menu. Its worth level is increased than customary quick meals like McDonald’s, however decrease than advantageous 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 might probably attain about 1,000 shops by 2030. That ought to generate regular development over the following 5 years, but it surely’s nonetheless approach beneath Chipotle’s present retailer rely of three,700, and it might proceed to develop at a wholesome tempo after 2030.
It isn’t simply retailer development and gross sales development which were spectacular. It is reporting increased comparable sales, which implies persons are coming again for extra. It has additionally been reporting constructive internet earnings since its first quarter as a public firm, and it is rising.
In Q3, complete income elevated 39% yr over yr, and comparable gross sales elevated 18%, which is an outstanding exhibiting. Restaurant-level revenue margin elevated from 25.1% to 25.6%, and internet earnings climbed from $6.8 million to $18 million. Administration raised its outlook for the fourth quarter to about 12.5% comparable gross sales development and 24.5% to 25% restaurant-level revenue margin.
Dangers to concentrate on
Cava inventory has been falling over the previous two weeks, which is not uncommon earlier than an earnings report, particularly when there’s been numerous momentum. Nonetheless, there are different elements that may very well be influencing the inventory drop, reminiscent of 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 could be a vote of confidence in what it might probably turn out to be. Rising an organization to triple its dimension 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 forward, 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 worth, the near-term upside would not look so excessive.
Is now the time to purchase?
If Cava releases one other flawless report on Feb. 25, the inventory is prone to bounce. But when there’s something disappointing, reminiscent of an earnings miss or mediocre outlook, the inventory is prone to drop. There’s numerous confidence wrapped up in such a excessive valuation.
I feel that Cava has a brilliant future, and over the following 5 to 10 years, it ought to sustain regular and powerful development. When you’ve got that point to carry, it will not matter an excessive amount of in the event you purchase immediately or after the earnings report; you’ll be able to’t time the market. Nonetheless, I’d warning shopping for at this worth, as a result of there are numerous excessive expectations constructed into it. I like to recommend ready for a extra enticing entry level. An alternative choice when the potential seems good however the worth is excessive is to make use of a dollar-cost averaging technique to construct a place over time.
Must you make investments $1,000 in Cava Group proper now?
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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 recommends the next choices: brief March 2025 $58 calls on Chipotle Mexican Grill. The Motley Idiot has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the creator and don’t essentially mirror these of Nasdaq, Inc.
