Best Stock to Buy Right Now: Cava vs. Chipotle Mexican Grill

In the world of fast-casual restaurants, two companies stand out with similar concepts for customizable tables, but in different cuisine categories: The Cava Group (COFFEE -0.89%) and Chipotle Mexican Grill (CMG -1.12%). Each has generated market-beating returns since going public, but which of these restaurant chains offers the tastiest opportunity for investors here? Let’s try to find out.

Weighing the financial situation

Chipotle’s successful strategy of having only company-owned and operated restaurants was a model that Cava, a Mediterranean food chain, imitated. At the end of that second quarter, Chipotle operated 3,530 restaurants, while upstart Cava had just 341 locations.

In Q2, Chipotle generated revenue of $2.97 billion and net income of $455.7 million, for year-over-year growth of 18.2% and 33.3%, respectively. Its revenue growth was partially attributed to the 262 net new locations opened in the last 12 months, but it also grew its comparable restaurant transaction volume by 8.7% year-over-year. Additionally, the company’s restaurant operating margin increased from 27.5% in Q2 2023 to 28.9% in Q2 2024.

By comparison, in Cava’s fiscal second quarter, which ended July 14, it generated $231.4 million in revenue and $19.7 million in net income, up 35.2% and respectively 203.1% from one year to another. The increase was largely driven by 62 net new locations added since Q2 2023 — a 22.2% year-over-year expansion — as well as a 9.5% increase in traffic. Cava’s restaurant margin also improved from 26.1% in Q2 2023 to 26.5% in Q2 2024.

Given that Chipotle’s footprint is nearly 10 times larger than Cava’s, there will be significant differences between the two in terms of revenue and profits. For this reason, the most important metric to focus on when comparing them is operating margin at the restaurant level. This captures both a chain’s pricing power and its operational efficiency. In this case, the advantage goes to the more established chain, Chipotle.

Growth opportunities

Cava management hopes to triple its number of locations to 1,000 by 2032. However, management does not plan to open new restaurants at breakneck speed. The Mediterranean chain opened 72 new restaurants in 2023 and expects to add only 54 to 57 restaurants in 2024.

This slowdown is less about demand and more about management protecting its brand and quality as the company grows. During the first quarter earnings call, co-founder and CEO Brett Schulman made this point. “We’re not just growing a business, we’re creating long-term value for our guests, team members and shareholders,” he said.

By comparison, Chipotle’s long-term plan is to double its number of restaurants to 7,000 in North America, though it did not specify when it expects to reach that target. Chipotle also has overseas expansion opportunities and already operates locations in United Kingdom, France, Germanyand Kuwait. The company plans to open between 285 and 315 new restaurants in 2024. In the first half of 2024, it opened 95 new company-operated locations and its first licensed location.

Some long-term strategic plans may have been put on the back burner, however, after former CEO Brian Niccol stepped down in August to take over as CEO at Starbucks. To fill the role of interim CEO, Chipotle named Scott Boatwright, Chief Operating Officer, who joined the chain in 2017. However, the sudden departure of Niccol — who had led the company since 2018 — creates some uncertainty about to its growth plan. given that he had a major hand in its conception.

Both companies offer incredible long-term growth opportunities when it comes to adding new restaurants. However, given Chipotle’s sheer size and the fact that it recently lost its well-respected CEO, the edge in this category goes to Cava.

Rating vs. ASSESSMENT

It will come as no surprise that Chipotle’s $79.7 billion market cap is much larger than Cava’s $14.5 billion. But to gauge which stock is the best, consider their forward price-to-earnings (P/E) ratios. Chipotle is currently trading at around 53 times forward 12-month earnings, while Cava trades at a heady 312 ratio.

CAVA Market Cap data by YCharts.

Additionally, when comparing market cap and sales to the number of locations, Chipotle stock looks cheaper. The average Cava restaurant is valued at $42.5 million and generated nearly $679,000 in revenue last quarter. For comparison, each Chipotle location has an average value of $22.6 million and produced about $842,000 in revenue last quarter.

Overall, between upstart Cava and established Chipotle, the latter has the better-priced stock in the category.

Is Cava or Chipotle the best stock to buy?

Cava has generated a lot of excitement among investors — understandably so, given that the chain is already profitable, debt-free and has lofty growth goals. However, its stock already has soaring long-term expectations. Between these two restaurant stocks, Chipotle, with its market-leading position and less ambitious valuation, offers a better opportunity for buy-now investors.