Mediterranean fast-casual restaurant chain Cava Group (NYSE: CAVA) is often seen as the next Chipotle Mexican Grill (NYSE: CMG) due to its impressive growth opportunities and the potential upside it possesses. This year, Cava's stock has been generating stronger returns for investors, with its share price up over 227% entering trading on Tuesday, versus just 32% gains for Chipotle's stock.
With Cava posting far more impressive results than Chipotle of late, has it already become the better growth stock to own?
How the companies compare on revenue growth
A key metric in evaluating growth stocks is inevitably going to be the year-over-year revenue growth a business generates. Cava has been accumulating much stronger results in recent quarters, with its sales typically well up over 20%.
CMG Operating Revenue (Quarterly YoY Growth) data by YCharts.
However, it's important to note that while Cava is indeed growing at a much faster rate, it's also a much smaller business than Chipotle. The latter generated $2.8 billion in revenue in its most recent quarter (which ended on Sept. 30). That's over 11 times the $244 million that Cava posted in sales in its last quarter, which covered a similar time frame.
Since it's going up against smaller numbers, it's easier for Cava to generate higher growth rates than Chipotle. Plus, with a smaller footprint (352 restaurants versus over 3,600), there will be greater opportunities for Cava to expand its presence around the world than there will be for Chipotle, especially in fast-growing markets.
This is a good example of how context is important when comparing growth rates. Smaller businesses can often seem more attractive since they are growing faster, but it's also more challenging for a larger business to produce the same type of results.
Chipotle has an advantage in terms of profitability
While Cava Group is growing sales at a faster rate than Chipotle, one area where it's still lagging behind is on the bottom line. Having strong profit margins can be key in ensuring that as the business scales and grows, so too do earnings.
As earnings numbers rise, that can improve a company's valuation. Its price-to-earnings multiple will come down, which can attract not just growth investors but value investors as well.
CMG Profit Margin (Quarterly) data by YCharts.
Cava's profit margin has improved significantly in recent quarters, and that's a development that investors will want to keep an eye on. If the gap in the chart above continues to shrink and its margins get better, that's an excellent sign that the business is scaling in an efficient manner, which can make Cava a better growth stock to own.
Why I'd still go with Chipotle over Cava Group
Cava is a much smaller company than Chipotle, but it has been amassing some impressive results in recent quarters. While it has been performing better in terms of year-over-year revenue growth, it has an advantage in being able to focus on high-growth areas and markets to expand into. Chipotle, meanwhile, has to be more selective in deciding where to expand to avoid potentially cannibalizing existing store sales due to its larger presence. Ignoring those details could falsely make it appear as though Cava is a much better growth stock, when in reality, its smaller size plays to its advantage.
Chipotle is a far more profitable company, and it's trading at 56 times its trailing earnings, compared with a multiple of over 340 for Cava Group. Both of these restaurant stocks can potentially make for solid long-term investments, but I'd argue that Chipotle's results are more impressive given its much larger and more established market presence. And at a lower valuation, it looks like the better buy at this stage.
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David Jagielski 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 and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
