Where will the stock of cava be in 5 years?

Cava Group (COFFEE 1.34%) shareholders are fat and happy after the last year. At the time of writing, the Mediterranean restaurant chain’s stock is up 300% over the past 12 months, making it one of the best-performing stocks in the world over the past year.

The recent IPO has become an investor favorite due to strong traffic growth and room to expand restaurant locations across the country. However, the stock now has a demanding valuation, with a market cap of $14 billion and sales of less than $1 billion. Where will Cava Group shares be in five years and should you buy or sell shares today? It’s time to take a closer look and analyze this 2024 investor favorite.

Chipotle but for Mediterranean cuisine

The founders of Cava had a fantastic idea: take the success of Chipotle and apply it to other international cuisine. They chose Mediterranean style food and it became a hit. Cava now has 341 locations across the United States, an increase of more than 20% over last year. In 2024, it expects to open about 55 new locations.

Even better is Cava traffic and same store sales growth. When a Cava opens in a new location, it consistently sees increases in traffic as people try the concept and become fans of the food. I mean, who isn’t a fan of a steak and feta pita wrap?

In the last quarter, traffic to Cava restaurants — on a restaurant basis — was up 9.5% year-over-year. Same-store sales growth was 14.4%. Same-store sales measure sales at existing restaurant locations. Typically, a restaurant will generate a low single-digit percentage increase in same-store sales. The nearly 15% increase in cava blows most restaurants out of the water.

Profitability is strong. Cava’s restaurant-level profit margins are 26.5%, which should translate to consolidated profit margins of at least 10% to 15% when overhead costs are included, once the company stops claiming growing so aggressively. Today, it has an operating margin of just over 5%.

Growth projections are clear

Restaurant brands can be great growth investments because of the easy way to expand the number of locations in the United States (and possibly internationally). Cava appears to be on a similar path to Chipotle and believes it can reach at least 1,000 locations in the United States, if not more.

Today, the company has 341 locations and plans to add 55 locations to its arsenal this year. If the company can add an average of 75 units per year over the next five years, it will have 716 locations in five years, or more than double what it has today. This is a clear growth prospect that excites the investment community.

Per unit, Cava locations generate $2.7 million in annual sales. Assuming these strong same-store sales continue, average unit volume may reach $3.5 million in five years. Multiply that by 716 locations and you get $2.5 billion in revenue over five years. Finally, we should apply a profit margin to this income, which can probably expand to 10% by the end of this time period. This equates to $250 million in earnings over five years for Cava Group.

CAVA Revenue (TTM) data by YCharts

Where will the stock of Cava be in 5 years?

After surging 300%, Cava now trades at a market cap of $14 billion. That’s about 17 times its trailing sales and a huge multiple of its trailing earnings.

But in five years? Above, we illustrated that there is a clear path for Cava to grow its sales and profits over the next five years. Applying that $250 million earnings estimate to a $14 billion market cap, you get a five-year price-to-earnings (P/E) ratio of 56. AP/E of 56 would be expensive on a final basis. But based on five-year forward estimates? It’s downright absurd.

Cava is a great deal. However, the stock is extremely overvalued. I think stocks will probably be lower — or at least flat — five years from now. Avoid buying Cava shares unless the share price gets cheaper.