Cava Group (NYSE: CAVA) shareholders are sitting fats and completely happy after the final 12 months. As of this writing the inventory within the Mediterranean restaurant chain is up a whopping 300% within the final 12 months, making it one of many best-performing shares on the earth during the last 12 months.
The latest IPO has grow to be an investor favourite with its sturdy site visitors progress and room to broaden its restaurant places across the nation. Nevertheless, the inventory now has a demanding valuation with a market cap of $14 billion and fewer than $1 billion in gross sales. The place will Cava Group inventory be in 5 years, and must you purchase or promote shares at this time? Time to take a more in-depth look and analyze this 2024 investor favourite.
Chipotle however for Mediterranean delicacies
The founders of Cava had a incredible thought: take the success of Chipotle and apply it to a different worldwide delicacies. They selected Mediterranean-style meals, and it has grow to be successful. Cava now has 341 places unfold round the US, with unit rely rising by over 20% 12 months over 12 months final quarter. In 2024, it expects to open round 55 new places.
Even higher is Cava’s site visitors and same-store gross sales progress. When a Cava opens in a brand new location, it constantly sees upticks in site visitors when folks check out the idea and grow to be followers of the meals. I imply, who is not a fan of a steak and feta pita wrap?
Final quarter, site visitors to Cava eating places — on a per-restaurant foundation — grew 9.5% 12 months over 12 months. Similar-store gross sales progress was 14.4%. Similar-store gross sales measure the gross sales from present restaurant places. Sometimes, a restaurant will generate low single-digit share progress for same-store gross sales. Cava’s close to 15% progress blows most eating places out of the water.
Profitability is powerful. Cava’s restaurant-level revenue margins are 26.5%, which ought to translate to at the least 10% to fifteen% consolidated revenue margins when together with overhead prices as soon as the corporate stops pushing for progress so aggressively. In the present day, it has an working margin of barely above 5%.
Development projections are clear
Restaurant manufacturers might be nice progress investments due to the simple path to increasing unit rely throughout the US (and ultimately internationally). Cava appears to be like to be on the same path as Chipotle and believes it will possibly attain at the least 1,000 places in the US, if no more.
In the present day, the corporate has 341 places and plans so as to add 55 places to its arsenal this 12 months. If the corporate can add a median of 75 items per 12 months for the following 5 years, it is going to have 716 places in 5 years, or greater than double what it has at this time. That may be a clear progress prospect that has the funding group excited.
On a per-unit foundation, Cava places are producing $2.7 million in annual gross sales. Assuming these sturdy same-store gross sales persist, common unit quantity can hit $3.5 million in 5 years. Multiply this by 716 places and you’re going to get $2.5 billion in income 5 years from now. Lastly, we must always apply a revenue margin to this income, which may doubtless broaden to 10% by the top of this time interval. That equals $250 million in earnings 5 years from now for Cava Group.
CAVA Revenue (TTM) information by YCharts
The place will Cava inventory be in 5 years?
After rising 300%, Cava now trades at a market cap of $14 billion. That is round 17 instances its trailing gross sales and an enormous a number of of its trailing earnings.
However what about in 5 years? Above, we illustrated that there’s a clear path for Cava to develop its gross sales and earnings over the following 5 years. Making use of that $250 million earnings estimate to a $14 billion market cap, you get a price-to-earnings ratio (P/E) of 56 in 5 years. A P/E of 56 could be costly on a trailing foundation. However based mostly on five-year ahead estimates? That’s downright absurd.
Cava is a good enterprise. Nevertheless, the inventory is grossly overvalued. I feel shares are doubtless decrease — or at the least flat — 5 years from now. Keep away from shopping for Cava inventory except the inventory worth will get cheaper.
Do you have to make investments $1,000 in Cava Group proper now?
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Brett Schafer 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: quick September 2024 $52 places on Chipotle Mexican Grill. The Motley Idiot has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the writer and don’t essentially mirror these of Nasdaq, Inc.
