Best Current Investment Option: Chipotle versus Cava Mezze Grill
Best Current Investment Option: Chipotle versus Cava Mezze Grill
In the fast-food industry, we frequently mention names like McDonald's. However, non-burger-focused chains have been creating quite a stir recently. Particularly, I'm referring to Cava Group (-12.13%) and Chipotle Mexican Grill (-1.25%). Cava is a Mediterranean-themed chain and a fresh face in the game, while Chipotle is more established. Both present compelling investment possibilities, yet which is the superior choice at the moment?
Recent performances
During the third quarter, Cava easily surpassed Chipotle in several significant areas. The Mediterranean eatery reported a 39% annual revenue increase, in contrast to Chipotle's 13%. Furthermore, Cava led in same-restaurant sales growth (comps) with a 18.1% rise, compared to Chipotle's 6%.
It's crucial to mention that Cava's comps growth was boosted by a 12.9% increase in customer visits and a hike in menu prices. Additionally, Cava saw its diluted earnings per share (EPS) grow by 150% to $0.15, while Chipotle saw an EPS growth of 21.7% to $0.28 per share.
While these figures are impressive, they shouldn't be the sole basis for investment decisions. Year-to-date, Cava earnings have risen 83.3% to $0.44 per diluted share, while Chipotle's have grown 27.9% to $0.87 per diluted share. Chipotle's sales were up 15.13% through the first three quarters of the year, whereas Cava's revenue soared 33.5% to $736.3 million.
In terms of growth, Cava has dominated this year. The company is leading in revenue and earnings and appears to be maintaining its momentum. However, given its smaller size, its percentage gains may seem more significant due to the exceptional growth. With over $728 million in revenue last year and the growth achieved thus far in 2024, the gap is closing rapidly.
Evaluations and computations
Since I last wrote about Cava, its stock has gone up by 30% from the end of August until now. In comparison, Chipotle's shares have risen by 5.69%.
Moving forward, analysts are predicting Cava to have full 2024 EPS of $0.50. Given its history of beating estimates, I consider this projection quite reliable.
The company's own revised guidance also indicates that earnings growth should continue to meet estimates at the minimum. In its recent quarter, management adjusted its full-year comps growth estimates from a range of 8.5% to 9.5%, to a range of 12% to 13%.
I believe this upward trend suggests that Cava could record another impressive quarter and reflects the chain's strong prospects as a whole. If it reaches analysts' average full-year EPS estimate of $0.50, this would give the stock a forward P/E of 284 times full-year earnings.
Chipotle's most recent results included full-year guidance for comps to increase by the middle to high single digits. While this falls slightly behind Cava's guidance, it still displays robust growth. Analyst estimates are projecting a full-year EPS of $1.07 for Chipotle, which would give the Mexican chain a forward P/E of 54 times earnings. It's evident that when considering current near-term expectations, Chipotle prevails in the valuation battle.
Investment decisions
So how does one compare these two companies based on this information? Overall, Cava is a younger business, having been founded in 2006, contrasting Chipotle, which has been operational since 1993. Both companies boast solid financial health and high cash reserves, but Chipotle has exhibited stronger cash flow over the past few years.
Ultimately, this comes down to personal preference. Chipotle is a more established business with a proven track record, while its price-to-earnings ratio is significantly lower than Cava's. Yet, it doesn't match Cava's growth rates.
My perspective is that the younger company, with its similar business structure but a focus on Mediterranean food, coupled with its recent introduction of steak, stands to deliver better returns over the coming years. Admittedly, it's a more expensive stock based on an earnings perspective, but its higher growth rates in revenue and earnings make it appealing.
To reiterate, I don't think Chipotle is a poor investment; I believe Cava's momentum is more compelling. Ever since 2023, investors have been supporting the restaurant chain's shift to profitability and its revenue growth. Moreover, earnings surprises have typically led to a strong stock performance.
My only word of caution is to consider whether Cava shares might dip a bit before investing. Despite its growth, it's trading conservatively at 284 times forward full-year earnings. In essence, it's by no means a cheap stock.
Given the financial performances and projections, Cava Group's forward P/E ratio of 284 times full-year earnings is significantly higher than Chipotle Mexican Grill's 54 times earnings, indicating a higher valuation for the younger company. However, Cava's recent growth in revenue and earnings is compelling, making it an attractive investment opportunity for those seeking higher returns.
Despite Chipotle's lower valuation, its proven track record and stronger cash flow over the past few years might appeal to investors seeking a more stable investment with lower risk. Ultimately, the choice between investing in Cava Group or Chipotle Mexican Grill depends on an investor's risk tolerance, time horizon, and preference for growth over value.