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Why Cava Group Stock Jumped 39% in July

Motley Fool - Tue Aug 8, 2:13PM CDT

What happened

Shares of Cava Group (NYSE: CAVA) were gaining in its first full month as a publicly traded company. A number of Wall Street analysts weighed in with positive ratings on the stock after the quiet period ended following its initial public offering (IPO) in July.

According to data from S&P Global Market Intelligence, the stock finished July up 39%. As the chart below shows, the gains in the stock came in two separate spurts.

CAVA Chart

CAVA data by YCharts

So what

Cava has attracted a lot of attention from investors since its June IPO as many see parallels between the restaurant stock and Chipotle Mexican Grill, including its menu, format, and even restaurant design. Cava also has strong average unit volumes at $2.3 billion and restaurant-level profit margins that show that it could be substantially profitable as it expands.

Wall Street signaled a bullish stance on the stock when it initiated ratings on July 10, sending the stock up 11%. Among Cava's supporters are J.P. Morgan's John Ivankoe, who gave the stock an overweight rating, saying shares "still have room to grow," as the company has a "broadly appealing consumer offering." Jefferies also gave the stock a buy rating, saying an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of mid-20% to 30% is within reach.

The stock got another boost that Wednesday after the Consumer Price Index report showed inflation slowing faster than expected, which indicates that the economy could be on the rebound and that a recession won't happen. It also makes it less likely that the Federal Reserve will raise interest rates, though the central bank did lift them by another 25 basis points at the end of July.

Nonetheless, Cava still closed out July with strong gains.

Now what

Shares of the Mediterranean fast-casual chain have pulled back in August on little news, showing the stock remains volatile as investors debate its valuation, and it will give its first earnings report as a publicly traded company on Aug. 15.

Analysts are expecting revenue of $163.2 million and a loss per share of $0.02.

While the business does look promising and has a number of things in common with successful restaurant chains like Chipotle, the stock is expensive at around 10 times trailing annual sales, which means that high expectations are already baked into the stock.

Expect shares to be volatile following the results as it will take time for Cava to reach market equilibrium.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Jeremy Bowman has positions in Chipotle Mexican Grill. The Motley Fool has positions in and recommends Chipotle Mexican Grill, JPMorgan Chase, and Jefferies Financial Group. The Motley Fool has a disclosure policy.

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