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Looking to Buy Cava? Consider This Magnificent Restaurant Stock, Instead.

Motley Fool - Thu Aug 24, 8:45AM CDT

Cava Group(NYSE: CAVA) has been the talk of the stock market recently. Its red-hot initial public offering (IPO) has investors hoping to get a piece of a booming business with strong long-term growth prospects. Recent financial results that flew by Wall Street estimates added to the already elevated levels of optimism.

With shares cooling off a bit, though, you might be looking at quickly adding Cava stock to your portfolio. But perhaps it's a better idea to consider another top restaurant stock instead. Let's take a closer look at two businesses competing in the fast-casual industry.

A blowout quarter

For the 12-week period that ended July 9, Cava posted revenue of $171 million. This not only beat Wall Street estimates by nearly $10 million, but also represented a 62% year-over-year jump. That gain marked a slight slowdown from the first fiscal quarter.

This was driven by 16 new store openings during the quarter, giving Cava a total of 279 locations. The business registered an 18.2% rise in same-store sales, a figure that was propelled by 10.3% more foot traffic and a 7.9% benefit from the product and pricing mix.

Like most early-stage companies, Cava has generally struggled to achieve consistent positive net income. In fact, in fiscal 2022, the business posted a net loss of $59 million after losing $37 million the year before. But this trend reversed course in Q2 as Cava's profit came in at $6.5 million.

For the full year of 2023, executives predict same-store sales will increase 14% (at the midpoint), with 65 to 80 new stores being opened. The long-term goal is to have 1,000 locations in operation by the end of 2032. These are growth prospects that investors are clearly excited about hearing.

The strong results haven't prevented shares from sliding 27% this month, however, amid general weakness in the overall stock market.

Dominating the industry

While Cava might be an attractive buying opportunity for risk-inclined and growth-minded investors, it's also important not to forget about the business that dominates the fast-casual restaurant category: Chipotle Mexican Grill(NYSE: CMG).

The Tex-Mex chain missed consensus analyst estimates in the latest quarter with revenue totaling $2.5 billion although that figure was up 13.6% year over year. But adjusted earnings per share (EPS) of $12.65 outpaced expectations, which has become a usual occurrence.

Despite the top-line miss, the latest results showcase a business that's still benefiting from strong momentum. Same-store sales rose 7.4%. And management believes they will increase in the mid- to high-single-digit range for the full year.

Chipotle's profitability is also improving, even though it's already outstanding. The operating margin of 17.2% expanded significantly from the prior-year period.

Cava is getting all the attention right now because it's the hot new IPO stock, but investors can't forget that Chipotle has been thriving for a long time. Between 2017 and 2022, revenue and diluted EPS increased at compound annual rates of 14% and 39%, respectively, which helps explain why the stock is up 262% in the past five years. Chipotle's track record speaks for itself as it's a proven winner in the restaurant industry.

What's more, its growth prospects are also impressive. CEO Brian Niccol and his team believe that the chain can have 7,000 stores open in North America over the long term, translating to a near doubling of the current physical footprint. And this doesn't include overseas markets like in Europe, where Chipotle has stores in the London area, and the Middle East, where the business plans to partner with a local franchise group to open locations next year.

Since hitting an all-time high on July 18, Chipotle shares have tanked, dropping 13%. The stock now trades at a trailing price-to-earnings ratio of about 46, a much more attractive valuation than the trailing-five-year average of 81. This looks like a good opportunity to scoop up shares on the dip.

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

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