Is This Growth Stock a Buy After Its Q1 Beat and Raise?

The U.S. restaurant industry is thriving, with rising sales despite prevailing inflation and price pressures. According to the National Restaurant Association, food and drinking places registered sales of $93.9 billion in April, marking a 5.5% annual surge. Moreover, Americans continue dining out despite high prices, driven by strong consumer spending and personal income growth.

In 2024, top industry trends include fresh, dynamic, and nutritious offerings, particularly Mediterranean cuisine, which is sparking considerable buzz. Consumer preferences for protein-rich dishes and diet-friendly offerings have translated to success for Mediterranean-inspired chains such as CAVA Group, Inc. (CAVA), which looks well-positioned to leverage this trend.

Since its public trading debut on June 15, 2023, Cava stock has skyrocketed about 130%, far outpacing the S&P 500 Index's ($SPX) roughly 20% gain and the Advisorshares Restaurant ETF's (EATZ) 15% return over the same time frame. More recently, CAVA has been in the spotlight due to its impressive Q1 earnings, with investors cheering its positive free cash flow and a full-year guidance raise. Analysts remain upbeat about CAVA’s prospects, too, assigning a "Moderate Buy" rating to the stock.

But does CAVA merit consideration as an investment option? Let's have a closer look.

About CAVA Stock

Washington, DC-based CAVA Group, Inc. (CAVA) is a Mediterranean fast-casual powerhouse. Founded in 2006, CAVA has rapidly expanded its footprint to 323 locations. The restaurant is renowned for its diverse offerings, including fast-casual dining experiences and a retail line of Mediterranean crave-worthy dips, spreads, and fresh salads, catering to a health-conscious clientele with a penchant for bold flavors. Its market cap currently stands at $10 billion.

CAVA has been on a meteoric rise since its June initial public offering. Its stock soared from a 52-week low of $29.05 to a high of $96.93, set on May 30. With shares of CAVA up 104.8% on a YTD basis, CAVA has far outpaced the S&P 500 Index's 10.8% gain and the Advisorshares Restaurant ETF's 6.4% return.

In terms of valuation, CAVA stock is trading at 284.74 times forward earnings and 14.58 sales – higher than its more established industry peers, such as Chipotle Mexican Grill (CMG) and Texas Roadhouse Inc (TXRH).

CAVA’s Solid Q1 Beat & Raise

CAVA shares rose about 13% over two trading days last week after the company announced stronger-than-expected Q1 earnings results and raised its full-year outlook for new restaurant openings and same-restaurant sales growth. CAVA reported  a 27.5% annual revenue jump to $259 million, outpacing estimates by 5.5%, thanks to a 2.3% boost in same-restaurant sales and 86 new restaurant openings. The company swung from a net loss per share of $1.30 to an EPS of $0.12, smashing projections by 200%.

At the heart of CAVA's success is a focus on operational efficiency and customer experience. The integration of in-store and digital ordering systems paid off, with 37% of Q1 orders placed digitally. The company boasts a solid net cash position of $329.1 million. Furthermore, CAVA also generated its first quarter ever of positive free cash flow of $4.7 million.

During the earnings call, CAVA revealed plans to expand a new labor model to boost efficiency. This model will be tested in roughly 60 restaurants, up from 29, with a full rollout by year's end. Drive-thru units, set to comprise about one-third of 2024 developments, are already showing average unit volumes 10%-15% higher than traditional units, with 38 drive-thru pickup lanes currently in operation.

CAVA's growth projections are equally robust, with same-restaurant sales growth expected to be between 4.5% and 6.5%, up from the previous 3% to 5% range. Adjusted EBITDA guidance was also raised, and is now expected to be between $100 million and $105 million, up from $86 million to $92 million.

Analysts tracking CAVA predict its EPS to increase by 61.9% to $0.34 in fiscal 2024, followed by growth of 35.3% to $0.46 in fiscal 2025.

What Do Analysts Expect for CAVA Stock?

Analysts at multiple brokerage firms updated their ratings on CAVA after earnings. Morgan Stanley (MS) analyst Brian Harbour maintained an “Overweight” rating and raised the price target to $85 from $68.

Harbour highlighted the "clean, much stronger bottom line quarter" and management's raised guidance for fiscal year 2024 as signs of ongoing strength and near-term catalysts. He sees a bright near-term future for CAVA, but remains cautious about the long-term outlook.

Conversely, on June 3, JP Morgan Chase (JPM) analysts issued a downgrade for CAVA Group from “Overweight” to “Neutral,” while keeping the price target at $77, recently raised from $64.

In a research note, the analysts wrote, "Considering AUVs of $2.6m and cost of construction per box of >$1.5m, this level of valuation is unprecedented in the group. Stock at $92.55 sits too far above our $77 price target for us to hold onto an OW - we believe the incremental recommendation is hold/reduce positions vs scale up positions."

CAVA has a consensus “Moderate Buy” rating overall. Of the 14 analysts covering the stock, eight advise a “Strong Buy,” one recommends a “Moderate Buy,” and the remaining five suggest a “Hold.” 

The stock trades  at a premium to its mean price target of $82, but the Street-high target price of $94 for CAVA - freshly raised by Jefferies after the chain’s impressive Q1 earnings results - suggests an upside potential of nearly 7%.