Chipotle shares fall after CEO change. Should investors buy cava stocks?

Many investors have debated whether the fast-casual restaurant stock is better Cava Group (COFFEE -1.99%) or Chipotle Mexican Grill (CMG -1.33%). Given that Cava follows Chipotle’s playbook in the Mediterranean food genre and is a much smaller company, it’s a worthy debate.

However, that calculus changed after last week’s announcement that CEO Brian Niccol would be leaving Chipotle to take the top job at Starbucks. Niccol was the company’s first successful CEO since the departure of founder Steve Ellis, bringing considerable uncertainty to the fast-casual giant now that he is leaving. Does all this mean investors should ignore Chipotle in favor of Cava?

The advantage of Cava

Cava remains a founder-led company. Brett Schulman co-founded Cava in 2010, transforming it from a previously existing full-service restaurant and opening the first Cava in its current form in Bethesda, Maryland in 2011.

In many ways, Cava looks like a “second chance Chipotle,” copying the fast-casual concept and emphasis on healthier foods to launch a Mediterranean grocery chain.

Moreover, Cava only had 323 restaurants in the US in April. That’s less than a tenth of Chipotle’s footprint of more than 3,500 locations at the end of the second quarter of 2024. Because smaller businesses can more easily achieve a high percentage of growth, this factor appears to play into Cava’s hands.

Additionally, when it announced its intention to go public, Cava outlined a plan to have 1,000 restaurants by 2032, roughly tripling its current number. I predict rapid growth for years to come.

Why Investors May Still Consider Chipotle

However, with over 3,500 locations, Chipotle is an established and proven business model. Chipotle also plans to grow to 7,000 locations in North America. While it does not emphasize its presence outside of North America, the continuation of its success in other countries could bring the number of restaurants to well over 7,000. Instead, Cava did not outline any international plan.

Moreover, even if his future long-term leadership is unknown, Niccol has left his successor in a strong position. (Scott BoatwrightNiccol innovated with Chipotlanes and improved the company’s processes, ending E coli outbreaks that damaged Chipotle’s reputation and stock price. Therefore, its transition to new leadership has a high probability of success.

Despite being more established, Chipotle’s stock trades at a discount to Cava’s. As a newly profitable company, Cava’s P/E ratio will not adequately reflect its valuation. Cava stock is trading at a price-to-sales (P/S) ratio of nearly 12. In contrast, Chipotle stock is selling at less than 7 times its sales. This factor alone will likely convince some investors that Chipotle has greater potential for returns.

Ignore Chipotle; do you buy cava?

After considering several factors, Chipotle seems like the best choice, despite the sudden CEO change.

While Niccol’s departure brings uncertainty for Chipotle, he left the company firmly positioned to stay on the growth path. Additionally, its business model is a proven quantity with a massive footprint and ample opportunity to open more locations. In contrast, Cava is at an earlier point in its growth phase, which carries a greater risk of something going wrong.

When it comes to each company’s stated goals, Cava’s intention to triple its restaurant count to 1,000 is a higher percentage growth rate than Chipotle’s plan for 7,000 North American locations. However, Cava has no stated plan for international expansion. While Chipotle has not emphasized its small presence overseas, it does have locations in CanadaTHE United Kingdom, France, Germanyand Kuwait, and it speaks to a great expansion potential.

When that potential is combined with Chipotle’s lower valuation, it offers a simpler path to earnings for investors.