Chipotle Vs. Cava: Which Is The Better Buy? (NYSE:CAVA)

Recently, and too much fanfare, Mediterranean fast-casual spot Cava (NYSE:CAVA) went public, joining the ranks of the more than 4,200 other public companies listed on American exchanges.

After pricing the IPO well above its range, the stock traded up more than 38% to the ~$55 per share mark following the offering:

However, as initial enthusiasm faded and reality began to set in, investors have sold the stock down nearly 50% from peak to trough.

On the list of concerns? Slowing location growth, scalability & competition, and an extremely expensive valuation.

On the flip side of the equation, we have Chipotle (NYSE:CMG).

A Mexican fast casual chain with a much longer track record of success, Chipotle has pioneered the low ingredient count, locally sourced ‘build-your-own’ restaurant business model that is now used by countless copycats today.

As frequent customers of both chains, we thought it would be interesting to dissect each company as they stand today, at different points along the adoption S-curve, and determine which company appears to be a better opportunity and deserving of your hard-earned capital.

Without further ado, let’s dive in!

Financial Results

As always, before looking at the price action or valuation, it’s important to get a good understanding of the businesses in a vacuum.

Chipotle, for its part, has been on a winning streak.

For the last few years, the company has reported strong EPS beats (with the exception of one quarter), along with solid average mid-teens top line sales growth:

Zooming out, these results have been incredibly consistent over time, with top line growth and bottom-line growth parallel over time:

The growth of both the top and bottom lines indicates that margins have not deteriorated as the company has scaled, which is incredibly positive when it comes to both unit and same store sales economics.

More stores plus more sales per store plus stable margins and simplified logistics leads to happy shareholders:

Speaking of, as you can see, the incredibly important comp. Sales number continues to grow at high single-digit percentages YoY, which is impressive, especially compared against peers like Yum! Brands (YUM) or Restaurant Brands International (QSR) which have averages closer to 3-4% per annum.

This all comes on the back of relatively little R&D / marketing spend (although the brand doesn’t break it out, it appears to come to less than ~10% of revenue), thus indicating the strength of Chipotle’s brand overall.

Net net, Chipotle is a growth and profitability machine, with a strong brand and retail footprint.

On the other side of things, we have Cava.

Cava, as a less established brand, has a much shorter track record.

For its part, the company did show a huge EPS beat when it reported earnings last quarter, showing 32 cents in EPS vs. -3 cents expected:

This profit was on the back of a big increase in store-level profit, which shows that new Cava restaurants will add incremental revenue AND profit when opened:

This is incredibly bullish, as it means that as store count expands, profitability will as well, assuming that the increased investment and cost of opening new stores doesn’t scale as well, which there’s no reason to believe it will.

However, following the Zoe’s Kitchen conversions, the company has run out of cheap retrofits and will have to open new stores the hard way, which should eat into consolidated profits as SG&A increases due to the increased costs surrounding permitting, renovating, etc.

That said, the company is essentially running the Chipotle growth playbook, targeting the same customers in the same regions; slightly wealthier, slightly more educated consumers who can afford the company’s offerings on a regular basis.

Zooming out, and the company is making progress on all of the correct fronts financially as well:

As you can see, Revenue has grown, but so has same store sales (at nearly 20%!), along with increased overall EBITDA margin.

Finally, another underappreciated fact is that Cava’s digital revenue mix is increasing, which allows the company to operate more efficiently, as prediction software will be able to optimize same-store logistics.

Additionally, higher digital engagement will allow the company to market more efficiently, offering ‘right-moment’ push notifications and promotions. This is something Uber Eats already does (have you gotten the Uber Eats promotion at work right before lunchtime?), and we expect that as Cava’s loyal customers go digital, there will be more opportunities to convert them again and again.

Taken together, Cava looks like a well-run, profitable restaurant chain with significant tailwinds, an insurgent brand, and solid unit economics.

But what do each of these companies cost?

Valuations

Let’s take a look at what each of these companies is currently going for.

Right now, Cava doesn’t have a lot of comparable metrics to consider, although there are some things that we can glean:

On a forward-looking basis, CMG is modestly more expensive when comparing EV/Sales, which seems like a fairly good number to compare. However, when comparing forward-looking EV/EBITDA, Cava looks twice as expensive as CMG.

Zooming out further, 3.5 billion, Cava’s current market cap, looks incredibly expensive for a company earning 6 million in quarterly net income.

However, the market is likely betting that as things scale, consolidated margins will catch up, and the output will be comparable.

Which is better?

There’s no doubt in our mind that Cava’s recent decline has played a part in creating any sort of question around which is a better investment.

If Cava was double the price it is now, then all the growth in the world would make it a tough pitch against Chipotle, which is so well run, so profitable, and so well-loved.

However, now that things have come back in a bit, making a decision is a much tougher choice.

Ultimately, it’s tough to go wrong. Both companies are great.

If you’re looking for a more volatile-high growth investment, then Cava is a solid choice (although selling put options may be the most optimal way to enter the stock at a better price).

If you’re looking for an EPS growth machine, then Chipotle should be your go-to. Right now, both companies make viable investments, it’s just a matter of choosing what you prefer more in a company, and what your time horizon is.

Summary

For our money, Cava seems like the better long term play. Sure, Chipotle is a great business, but the market is relatively saturated. Cava has improving economics and a plan to scale, and even if that costs more, we think the company has the chops to pull it off.

They’ve gotten this far. –

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