Chipotle Mexican Grill (NYSE: CMG) is probably best known for its assembly line-style fresh food preparation. Cava Group (NYSE: CAVA) has also built its foundation on the same concept, but with the distinction that Chipotle focuses on Mexican food while Cava specializes in Mediterranean fare. The latter, of course, is a much smaller chain, which makes the comparison with Chipotle extra interesting. Which is a better investment right now?
Chipotle is a huge success story
Every restaurant chain starts from modest beginnings, but not every restaurant chain can grow to have 3,500 locations like Chipotle. Sure, McDonald’s (NYSE: MCD) and Yum! Brands’ (NYSE: YUM) Taco Bell are both much larger, but they’ve also been around for a lot longer than Chipotle. Chipotle, in fact, has only been a public company since 2006, when it held its initial public offering.
By just about any measure, Chipotle is a standout in the restaurant sector today. And the chain continues to execute at a high level, with first-quarter sales rising a huge 14.1% and same-store sales, which looks at sales for locations open for at least a year, up a very impressive 7%. That speaks to a management team that is firing on all cylinders, operating its current fleet at a high level, which is captured in the same-store number, while also adding new locations that boost overall sales.
There’s a reason why Chipotle’s price-to-earnings ratio is nearly 60. While that’s below the five-year average of around 70, it is still quite high on an absolute basis. Investors are paying up for a fairly large company that they expect to keep growing strongly.
That’s entirely possible, but growth becomes more and more difficult to achieve the larger you get. It’s a numbers game. Adding one restaurant when you own only one restaurant is a 100% increase in the store base. But the third location is only a 50% increase. The more restaurants you add, the slower the expansion rate becomes. Still, for more conservative investors looking to invest in growth stocks, Chipotle’s proven success will be very compelling. Just go in knowing you are paying a big premium, noting that McDonald’s P/E is only 22 and its five-year average P/E is 27.
Cava is all about the potential
By comparison, Cava is a tiny little restaurant chain with just 320 or so locations. But it opened 14 new sites in the first quarter of 2024. All told, the store base grew a huge 22% year over year! That’s a number that would be almost unthinkable for Chipotle, which speaks to the opportunity ahead for Cava.
Cava is coming off of a very strong run. In 2023 its sales increased nearly 60% and its same-store sales rose by almost 18%. Those just aren’t sustainable figures and they will probably make 2024 results look a bit less exciting because the company will be comparing against truly astounding growth figures. For example, first-quarter 2024 sales “only” rose 30% or so while same-store sales were up just 2.3%. Obviously, 30% sales growth is still very strong, but the 2.3% same-store figure is respectable for a fast-food company, though nowhere near as enticing as 18%.
But if Cava can keep expanding its store count and just maintain that low-single-digit same-store sales growth, it will still be a very fast-growing restaurant chain. And that, in a nutshell, is the investment thesis. There’s one small problem, though. Cava is a very young company, having only held its IPO in mid-2023. Given that the P/E ratio is a massive 225, investors are clearly pricing in a lot of success in the years ahead (and probably looking at Chipotle to gauge its long-term potential). If the company lives up to expectations, it could be well worth the price and risk. If not, well, Wall Street is littered with restaurants that have crashed and burned.
The bottom line: There’s more long-term growth opportunity with Cava than there is with Chipotle. But that opportunity is far from certain, which will make Cava most appropriate for aggressive growth investors.
Cava vs. Chipotle: Which one wins?
There are a few simple answers here and some more complex ones. For example, neither Chipotle nor Cava pay a dividend, so don’t buy either if you are an income investor. And given the lofty P/E ratios, value investors may want to pass as well. But if you are a growth investor, you might find each of them of interest.
The difference is going to be whether you want to pay up in a big way for potential growth from a company with a short operating history or pay up in a more modest way for potential growth from a company with a solid track record of expanding over time. Or, to put it another way, most growth investors will probably find Chipotle more interesting while those looking to swing for the fences will likely be more attracted to Cava.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.
Best Stock to Buy Right Now: Chipotle Mexican Grill vs. Cava Group was originally published by The Motley Fool
