Topics: Cava, valuation, double portions of chicken, rational exuberance

Let’s not beat around the bush here… CAVA’s stock price and valuation are going bananas; on the face, it looks waaayyy overpriced.

You may choose whatever valuation methodology you’d like, they all point to the one observation:

Cava’s stock is expensive.

Is that warranted though?

Cava’s Valuation

Let’s start with a quick background…

Cava was started in 2006 by three friends who would gather together over coffee for general vibes… Who knew friendship could generate such a massive ROI?

They IPO’d in 2023 and have been on a tear since, with significant stock growth and large increases in growth / same-store sales.

Chipotle, on the other hand, has been in existence since 1993 and is worth 5x more than CAVA (almost 13x larger on a revenue basis).

I’d view Chipotle as a solid competitor to Cava - similar vibes, same business model, comparable restaurant layout, etc. But the numbers tell a much different story.

Before we begin, here are some of the other comps we pulled for this analysis.

On a per-store basis, Cava’s stores are each valued at ~$30M, while Chipotle’s are valued at ~$25M.

If we go back to our dissection of valuations, there are two things that matter the most: return on invested capital and growth, in that order. Chipotle is winning the margin game, while Cava is winning the growth game.

Store-Level Data

Here’s a quick synopsis of their store-level data:

As you can see, Chipotle has Cava beat on per-store margins, but Cava’s margins are still strong (at least based on Q2 reporting - for FY 2024, they expect store-level margins to be 24.2%-24.7%). As some of you may know, however, Chipotle is planning on increasing portion sizes due to some “constructive feedback” (i.e. they got dunked on by some influencers). It’s TBD how that’ll impact their margins, but here’s some napkin math:

The CEO said that 10% of their stores were not operating based on SOP for portion sizes and retraining employees would cost $50M. Some people expect the portion sizes to increase by 10%, but in reality, it’ll probably increase by 10% * 10% = 1% (10% increase in sizes in 10% of the total stores). Thus, it’s reasonable to estimate a 1% (2% if you want to be conservative) hit to store-level profitability, still putting them above Cava’s FY estimates.

Other Stuff

I’m just going to data-dump some company-level information you can pull, but just to reiterate our initial points and add in some other items:

• Cava’s growth is much stronger than Chipotle (and pretty much every other QSR) other than Wingstop (and that’s just from a revenue perspective).

• Chipotle’s margin is much stronger on a per-store level.

• Chipotle’s margin looks even better on a corporate level due to the benefits of scale, good leasing contracts, and a more robust supply chain.

Let’s rapid-fire some other things on your mind:

Debt

• Chipotle has more debt relative to their total capital (about 50% of the company’s assets are financed via debt, while Cava financed about 1/3 of their assets with debt).

• Due to their lower margins, Cava has a lower DSCR and, in my opinion, presents more liquidity risk; do note that Chipotle’s current ratio is lower. IMO, neither has a pressing liquidity risk (unless Cava executes on their plan to expand growth via debt financing).

Cash flow

• Based on CapIQ’s math, both have negative cash flow conversion cycles (both around -5 or -6 CCC). Hot…

Technicals

• Cava: Overbought based on RSI and MACD

  

• Chipotle: Slightly overbought / neutral

  

Summary

I think this one comes down to two fundamental points:

1) Do you think that Cava can become the “next Chipotle”?

2) Are you unworried about consumer spending on eating out?

If you answer yes to both questions, Cava probably makes sense to buy.

I think the jury is out on point 1; I think they have a shot, but I’m not sure. Chipotle will fight tooth and nail for every % of market share and would likely sacrifice margin just to price them out of the market if it comes to it; Chipotle can hold on for a lot longer than Cava.

On point 2, I am very worried about consumer spending slowing down. Sure, the Fed’s cutting rates, but we’re seeing some large increases in credit card and consumer loan delinquencies, along with continually low savings rates for consumers. We’ve been overspending and the impacts are starting to set in. More on that later.

Concluding Thoughts

• Cava is v expensive to buy

• Cava is growing faster, but Chipotle has higher margin and is printing more money

• Do you want to risk overpaying for future growth or do you want to risk overpaying for the cash-flowing beast? Perhaps you want to avoid both altogether?

• Short interest in Cava is currently 10%, which is fairly high… Just throwing that last piece of info out there…. 😉 

Till next time…