Cava Continues to Prove It’s the New Chipotle | The Motley Fool

With markets so high, it’s particularly tough these days to entrust capital to high-valuation stocks. In Cava‘s (CAVA 2.86%) case, the Mediterranean food chain might be the exception. The stock is up over 26% in the last five days, thanks to a stellar second-quarter earnings report. I see this chain as the new Chipotle (CMG 0.81%) with great growth potential.

The results

Let’s start with the revenue growth. This is, after all, what everyone is looking for in a growth-focused company like Cava. The company managed to report revenue growth of 35.2% year over year in the second quarter to $231.4 million. How often do you see that level of growth? Same-restaurant sales increased 14.4%, while restaurant-level profit improved 37.3% year over year. In all, earnings of $0.17 per share outpaced expectations of $0.13.

Cava also increased its guidance for fiscal 2024. Same-restaurant sales are now expected to grow 8.5% to 9.5% compared to previous guidance of 4.5% to 6.5%. One of the big announcements here has been the introduction of grilled steak to menus, which the company announced has been outperforming expectations.

Cava’s performance is in contrast to that of many restaurant chains, which have struggled to increase traffic with a more fickle consumer base. McDonald’s, for instance, saw same-store sales fall 1% in its most recent quarter, compared to Cava’s 14.4% gain.

The stock

Over the last year, this stock has delivered 183% in share price gains, compared to the S&P 500‘s return of 27.5%. The performance has been amazing. The question now becomes: Can it continue? This is an easy stock to knock on an earnings basis. Cava is trading at over 900 times earnings based on 2023 diluted earnings results of $0.12 per share and 513 times full-year analyst estimates for 2024 of $0.23 per share.

Despite the expensive nature of the stock, I still like Cava over the long term. Traffic increased 9.5% during the quarter, which again is in contrast to what was a weaker quarter for restaurants. The company keeps beating expectations, meaning current estimates for the future aren’t necessarily accurate. Additionally, it is gaining clear momentum in an area of cuisine that hasn’t been tackled in this way before. The way the company is combining Mediterranean fare with a Chipotle-like business structure leads me to believe the story of surprises to the upside can continue, and investors have made it clear that they’re willing to put up with the high premiums on the stock if Cava outpaces expectations.

With under 400 current locations, Cava has a lot of growing to do compared to a similar enterprise like Chipotle, which has over 3,000 stores. Cava plans to open 54 to 57 new restaurants for the full year, meaning we’re going to see those top-line numbers continue to expand with the potential for unseen upside. In a restaurant sector seeing weaker traffic and same-store sales, I like the idea of sticking with the name that has momentum in the industry.