In this piece, I evaluated two fast-casual restaurant stocks, Chipotle Mexican Grill (NYSE:CMG) and CAVA Group (NYSE:CAVA), using TipRanks’ Comparison tool to determine which is better. Some investors compare CAVA to Chipotle, but the numbers suggest otherwise.
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Chipotle Mexican Grill is a fast-casual dining chain that specializes in Mexican food, making bowls, tacos, and Mission burritos to order in front of the customer. CAVA Group is also a fast-casual dining chain, although it offers Mediterranean cuisine with a dining experience to match. In addition to Cava Grill, CAVA Group also owns Zoes Kitchen, another restaurant chain with a Mediterranean-themed menu that it acquired in 2018.
Chipotle Mexican Grill is up 42.6% year-to-date, although it’s only up 26.1% over the last 12 months. Meanwhile, CAVA Group is up 49% since it went public in June.
For reference when valuing these stocks, the U.S. restaurant industry is trading at a price-to-earnings (P/E) ratio of 67.6 versus its three-year average of 44. The industry is also trading around its three-year average price-to-sales (P/S) ratio of 2.2. Now, without further ado, let’s analyze both stocks.
Chipotle Mexican Grill (NYSE:CMG)
Chipotle Mexican Grill has fallen by almost 7% since its last earnings report, bringing its P/E to 52.8 and its P/S to 5.8 versus its five-year mean P/E of 84.3 and five-year mean P/S of 5.3. Chipotle typically trades much higher than its industry, making it look undervalued, especially considering the other factors. Thus, a long-term bullish view looks appropriate.
For its second quarter, Chipotle reported adjusted earnings of $12.65 per share on $2.5 billion in sales versus the consensus numbers of $12.31 per share on $2.5 billion in sales. Net income came in at $341.8 million versus $259.9 million in the year-ago quarter. Further, same-store sales rose 7.4%, although this came up short of the consensus of 7.5%.
Zooming out, Chipotle’s longer-term trends look attractive. The company’s sales growth has been solid from year to year. In fact, while many restaurant chains struggled during the pandemic, Chipotle managed 7% sales growth. Meanwhile, its net income margin has ticked steadily higher, reaching 12% for the last 12 months (it was 10.4% in 2022).
Some may notice insider selling when analyzing CMG stock. However, while insiders have unloaded over $20 million worth of Chipotle shares over the last three months, a small number of transactions account for that total. These include an auto-sell transaction of $2.2 million two months ago and another auto-sell worth $4 million three months ago. Additionally, there were two non-open-market sells, one amounting to $10 million and another valued at $4.1 million, that also took place three months ago.
Notably, there have also been a large number of smaller auto-buy transactions, so insider sales trends aren’t as bad as they seem at first glance.
What is the Price Target for CMG Stock?
Chipotle Mexican Grill has a Moderate Buy consensus rating based on 16 Buys, six Holds, and zero Sell ratings assigned over the last three months. At $2,212, the average Chipotle Mexican Grill stock price target implies upside potential of 13.15%.
CAVA Group (NYSE:CAVA)
While Chipotle is well-established, with attractive long-term fundamentals and stock-price trends, CAVA Group has only been public for about a month and a half. Currently, the company is unprofitable and trading at an incredibly high P/S multiple of 10.6, calling for a bearish view.
The company has yet to release its first earnings report as a public company, but disappointment seems likely. Several analysts have compared CAVA to Chipotle, which could be partially why its stock has soared in the last 45 days.
However, its current valuation simply isn’t warranted. For example, CAVA only grew its sales by 12.8% between 2021 and 2022, making it a far cry from deserving a growth-stock valuation. In fact, CAVA has a market capitalization of $6.47 billion despite its lack of profitability and only $608.2 million in sales over the last 12 months.
Additionally, while CAVA management is confident the company will become profitable, it declined to give a timeline in a recent interview. Yes, CAVA reported a 52.2% compound annual growth rate from Fiscal 2016 to Fiscal 2022, but its net losses have also widened, growing from $37.4 million in 2021 to $59 million in 2022.
What is the Price Target for CAVA Stock?
CAVA Group has a Strong Buy consensus rating based on six Buys, two Holds, and zero Sell ratings assigned over the last three months. At $45.86, the average CAVA Group stock price target implies downside potential of 19.5%.
Conclusion: Long-Term Bullish on CMG, Bearish on CAVA
On top of the company’s positive fundamentals, Chipotle stock has more than tripled over the last five years and is up more than 4,000% since the 2006 initial public offering, making CMG look like an attractive buy-and-hold position.
However, even if CAVA does eventually become the next Chipotle, it’s a long way from that, and it has a long way to go before it can grow into its current valuation. It looks like the only way CAVA stock can go is down, even if it rises more in the near term. I believe it’s only a matter of time before the honeymoon period is over.
