KaVo Group (NYSE:CAVA) is one of the hottest restaurant growth stocks in some time. In 2024, it surged above $170 before falling back towards the end of the year.
But Argus Research analyst Christine Dooley sees the dip as a buying opportunity. Dooley recently reiterated her buy rating on the stock, along with the $158 price target she gave in November. That figure is 37% higher than the current share price of $115.
Cava is growing at an astonishing rate. Third-quarter revenue increased 39% year-over-year. The company is driving growth by opening more locations, but it's growth at existing restaurants that's been most impressive. Same-store sales increased 18% compared with the same period last year.
CEO Brett Schulman said in the third-quarter earnings report: "Our third-quarter results demonstrate the strength of our Mediterranean category-defining brands and the broad appeal of our unique value proposition, creating rapid products that will become the next major cultural gastronomy category.”
It also showed it can expand profitably, with net profit increasing from $6.8 million in the third quarter of 2023 to $18 million in the third quarter of 2024. Cava's restaurant profit margin is 25%, compared with Chipotle Mexican BBQ.
Chipotle has delivered huge returns to investors over the past 15 years, but its valuation has never been more expensive. Cava currently has a price-to-sales ratio of 14.8, which may be fair for a fast-growing software company, but not for a restaurant chain. Most analysts rate the stock a "hold."
Wall Street analysts can sometimes point out investors to some good ideas for stocks worth buying on dips, but in this case, I wouldn't follow Argus's advice. Cava may rebound in the near term, but its upside potential may be capped over the next few years until the company grows to the high expectations already priced into its stock price.
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