Cava Group(NYSE: CAVA) shareholders are sitting fat and happy after the last year. As of this writing the stock in the Mediterranean restaurant chain is up a whopping 300% in the last 12 months, making it one of the best-performing stocks in the world over the last year.
The recent IPO has become an investor favorite with its strong traffic growth and room to expand its restaurant locations around the nation. However, the stock now has a demanding valuation with a market cap of $14 billion and less than $1 billion in sales. Where will Cava Group stock be in five years, and should you buy or sell shares today? Time to take a closer look and analyze this 2024 investor favorite.
Chipotle but for Mediterranean cuisine
The founders of Cava had a fantastic idea: take the success of Chipotle and apply it to another international cuisine. They chose Mediterranean-style food, and it has become a hit. Cava now has 341 locations spread around the United States, with unit count growing by over 20% year over year last quarter. In 2024, it expects to open around 55 new locations.
Even better is Cava's traffic and same-store sales growth. When a Cava opens in a new location, it consistently sees upticks in traffic when people try out the concept and become fans of the food. I mean, who isn't a fan of a steak and feta pita wrap?
Last quarter, traffic to Cava restaurants -- on a per-restaurant basis -- grew 9.5% year over year. Same-store sales growth was 14.4%. Same-store sales measure the sales from existing restaurant locations. Typically, a restaurant will generate low single-digit percentage growth for same-store sales. Cava's near 15% growth blows most restaurants out of the water.
Profitability is strong. Cava's restaurant-level profit margins are 26.5%, which should translate to at least 10% to 15% consolidated profit margins when including overhead costs once the company stops pushing for growth so aggressively. Today, it has an operating margin of slightly above 5%.
Growth projections are clear
Restaurant brands can be great growth investments because of the easy path to expanding unit count across the United States (and eventually internationally). Cava looks to be on a similar path as Chipotle and believes it can reach at least 1,000 locations in the United States, if not more.
Today, the company has 341 locations and plans to add 55 locations to its arsenal this year. If the company can add an average of 75 units per year for the next five years, it will have 716 locations in five years, or more than double what it has today. That is a clear growth prospect that has the investment community excited.
On a per-unit basis, Cava locations are generating $2.7 million in annual sales. Assuming these strong same-store sales persist, average unit volume can hit $3.5 million in five years. Multiply this by 716 locations and you will get $2.5 billion in revenue five years from now. Finally, we should apply a profit margin to this revenue, which can likely expand to 10% by the end of this time period. That equals $250 million in earnings five years from now for Cava Group.
CAVA Revenue (TTM) data by YCharts
Where will Cava stock be in 5 years?
After rising 300%, Cava now trades at a market cap of $14 billion. This is around 17 times its trailing sales and a huge multiple of its trailing earnings.
But what about in five years? Above, we illustrated that there is a clear path for Cava to grow its sales and profits over the next five years. Applying that $250 million earnings estimate to a $14 billion market cap, you get a price-to-earnings ratio (P/E) of 56 in five years. A P/E of 56 would be expensive on a trailing basis. But based on five-year forward estimates? That is downright absurd.
Cava is a great business. However, the stock is grossly overvalued. I think shares are likely lower -- or at least flat -- five years from now. Avoid buying Cava stock unless the stock price gets cheaper.
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Brett Schafer 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 September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
