Wednesday, July 17, 2024

Is Cava’s Sizzling Stock Too Hot to Handle?

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Cava Group (NYSE: CAVA) has been on a hot streak lately.

After its IPO in June 2023, the stock price fell to about $30 per share. But since then, it’s staged a huge reversal, surging more than 200% to its current price of about $95.

Chart: Cava Group (NYSE: CAVA)

However, post-IPO price spikes are a classic trap in the investing world, so I encourage investors to temper any feelings of FOMO with some hard financial facts.

That’s where my Value Meter comes in. Let’s see what it has to say about Cava.

First, let’s examine the company’s enterprise value-to-net asset value (EV/NAV) ratio. This number tells us how much the market values the company relative to its assets.

Cava’s EV/NAV is a whopping 19.0, nearly triple the average of 6.6 for similar companies. This means investors are paying a big premium for Cava’s growth potential, which is typical for stocks that have recently gone public.

But while high-growth companies often trade at a premium, we need to ensure the growth is there to back it up.

And Cava’s recent results are impressive.

In Q1 of 2024, the company grew its revenue by 30% year over year and opened 14 new restaurants. It even turned a profit – no small feat for a young restaurant chain.

But here’s where things get sticky. Cava has been burning through cash as it expands. In three of the last four quarters, it had negative free cash flow.

On average, its free cash flow was -1.3% of its net assets during that span. That’s better than the -5.3% average for similar companies, but it’s still concerning to see a company consistently spending more than it’s bringing in.

To be fair, in Q1, Cava generated positive free cash flow for the first time ever. That’s a good sign, but one quarter doesn’t make a trend.

And while Cava’s concept seems to resonate with customers, rapid expansion comes with risks. To build on its success in the first quarter, the company will need to maintain the quality of its offerings and find good locations as it enters new markets.

Speaking of building on success, the company’s growth plans are ambitious. It aims to hit 1,000 locations by 2032, up from 323 today. That’s a lot of new restaurants to open and a lot of cash to spend.

Cava’s innovation is another bright spot. The company is currently rolling out a grilled steak option that could boost sales, and it’s testing a new loyalty program that could drive repeat visits. These are smart moves that could fuel growth.

But here’s the rub: Much of this potential seems to already be baked into the stock price.

Cava is trading at a premium valuation, and the market expects big things. If the company hits a bump in the road – say, a few bad restaurant openings or a slowdown in sales growth – the stock could take a hit.

Don’t get me wrong, I like Cava’s concept. Mediterranean food is hot right now, and the company’s customizable bowls and pitas hit the sweet spot between healthy and tasty.

But as an investor, I have to look beyond the delicious food and focus on the numbers. And right now, they don’t give me confidence in the stock’s valuation.

That doesn’t mean Cava is a bad company. It just means the stock price might be running ahead of the fundamentals.

For long-term investors who believe in Cava’s growth story, it could still be worth a look. But you might want to wait for a pullback before loading up your plate.

The Value Meter rates this one “Slightly Overvalued.”

Chart:

What stock would you like me to run through The Value Meter next? Post the ticker symbol(s) in the comments section below.





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