Best Stock to Buy Right Now: Cava vs. Chipotle

Investing in restaurant stocks it could prove to be a profitable endeavor. Imagine if you had bought shares of McDonald’s or Starbucks early. These companies are now world leaders in the industry.

However, there are smaller chains that investors have their eyes on, such as The Cava Group (COFFEE 1.61%) and Chipotle Mexican Grill (CMG 1.29%). Which of these popular restaurant stocks is the best buy right now?

Opening stores quickly

Cava is a fast-casual concept that serves healthy Mediterranean-inspired pitas and bowls. Customers can choose from a variety of proteins, toppings and sauces in a fully customizable and made-to-order format.

The key to Cava’s story is his store expansion manual. The company opened 72 new locations in fiscal 2023, propelling a 59.8% gain in revenue, with a goal of opening 52 more in the current fiscal year. And while there are currently 323 stores scattered across the country, management has huge plans for rapid growth.

The goal is to have 1,000 stores in the US by 2032, which translates into a threefold increase in footprint size. If Cava reaches this scale, its sales would be astronomically higher. Each location brings in an average of $2.6 million in annual sales, while posting a 25.2% restaurant margin.

It is encouraging that Cava is on the path to financial sustainability. The company generated operating income of $4.7 million in fiscal 2023, a huge improvement compared to the loss of $59.8 million the previous year. And in its most recent fiscal quarter (Q1 2024 ended April 21), Cava posted an operating profit of nearly $9.3 billion. It is moving in the right direction to a greater result.

Dominating the industry

While growth-minded investors might gravitate toward Cava because of its potential for expansion, it’s hard not to appreciate Chipotle’s continued success in the restaurant sector. There are key reasons to consider buying the Tex-Mex chain.

For starters, it’s also growing at a brisk pace. Revenue rose 18.2% in the latest quarter (Q2 2024 ended June 30), supported by robust same-store sales growth of 11.1%, which is significantly better than Cava. Chipotle is seeing strong, impressive traffic trends in this type of economic environment.

The company plans to open 300 new stores by 2024. But Chipotle’s management team sees potential in one day. 7,000 locations in North Americaroughly double the current number. This target does not include the company’s potential to further expand into Europe and the Middle East.

Chipotle’s profitability is unmatched in the restaurant industry. The business has a rare ability to offset inflationary pressures with higher menu prices. This helps explain why Chipotle’s operating margin in Q2 was 19.7%, which was higher than in the year-ago period. As each location increases its sales volume over time, along with prospects for margin expansion, Chipotle’s earnings are set to increase.

A critical factor

Based solely on the quality of their respective businesses, I’d pick Chipotle as the better investment by far. Its brand recognition, scale, growth potential and profitability are impressive. I honestly don’t see Cava ever matching that kind of success.

But as investors, we also need to consider another critical factor in the analysis process. And that’s the rating. I think that leads us to the same conclusion.

At the time of writing, Cava shares are trading with a nosebleed price-to-sell ratio of 9.9, while Chipotle’s multiple is 6.8. To be clear, both of these valuations are expensive, and that’s the main reason I don’t own either company. But the cheaper stock is the safer bet, especially since Chipotle’s core business has already shown how successful it can be.