CAVA 相对于其基本面仍被高估，在价格回落前维持持有评级。

Roughly 1 month ago, I downgraded Cava Group stock to a hold, downgrading it from a buy. At that point, Cava Group was selling at above $70 per share, closer to $75 per share.

Now, since then, the stock price has fallen considerably, roughly 40% roughly 33% and is now trading at around $55 per share. So, I wanted to take another look at the company and see if it's a buying opportunity on the dip now that the price is lower, is it a more attractive stock to buy?

So, one of the things I've liked about Cava is the aggressive revenue growth in the most recently completed quarter. Revenue increased by 31%.

And that was partly contributing two factors, new store openings and increases in same-store sales. 9% growth in same-store sales and 17 new restaurant locations opened. They now have 476 locations.

And I think longer term, there's room for this company to have about 2,000 to 4,000 locations across the United States. There are limited options in the Mediterranean food category, whereas there are plenty of options when you're thinking about pizza, when you're thinking about burgers, when you're thinking about burritos. So, I think there's an opportunity here.

Consumers have grown uh liking to the company's products. They're good-tasting food at relatively attractive prices. So, I think the longer term opportunity is there. That's why I've been attracted to this company, following it closely, looking at it as a potential opportunity.

And the growth has been longer in duration. It's not just the most recently completed quarter. Sales increased from around 500 million in 2022 all the way up to 1.4 billion over the trailing 12-month period.

And I like that sales are coming from those two sources. Same-store sales growth and new store openings. I would be concerned if all of the growth was coming from new store openings.

I want to see growth from existing locations, as well, because that shows me that they're getting returning customers, existing customers in the same area, in the same location, are coming back, and new customers are also joining.

Positive word of mouth, increasing customer value proposition, increasing customer satisfaction, are all evidenced in same-store sales growth.

So, I'm seeing that, and I'm seeing uh continued growth in new locations. So, I like the trajectory they're heading on. I like that they're also cash-flow positive, and they've been cash-flow positive for a while now.

But, one of the things I'm not too excited about is the fact that their cash-flow-to-sales ratio has peaked, right? It reached around 17% in the middle to late 2024, and has been around that level or slightly below that level over the past couple of years.

Similarly to its cash flow from operations to sales ratio peaking, the returns on invested capital did also peak at around 15% and have now dropped to 5%. Now, for a restaurant business, this is an important metric because you want to know that the management team is adding locations prudently in a way that's adding to the company's ROIC.

They're not spending more providing and losing the opportunity cost of capital in investing in new locations while those new locations, the amount of capital that's going out, are not bringing back sufficient returns on invested capital.

So, those are two of my concerns there for the cash flow from operations and returns on invested capital. They're not great, right? They're okay, and it's an early-stage company, so they, you know, get some leeway and time to get to those levels.

They were already generating profitability sooner than usual for a restaurant. They were already reporting, when I compare Cava Group to another great-performing restaurant company, Chipotle, Cava Group is ahead of Chipotle at these levels.

When Chipotle had about 500 locations, they weren't reporting as strong of results as Cava is reporting at those level of locations.

So, there's mixed results here for Chipotle for Cava Group, I should say. And the reason I'm being picky about that is because of the valuation.

It's trading at a forward price to earnings of 74, which is roughly three times the average stock in the S&P 500. So, it's selling at a premium price. So, I'm looking at it through that lens.

I'm looking at it through that premium business lens.

It is trading at its lowest forward price to earnings ratio going all the way back to January of 2024.

But given those declining trends in profitability and returns on invested capital, this is a little rich for me for this kind of business. Similarly, I updated my discounted cash flow valuation model for Cava Group and I valued the business at $52 per share.

I revised my estimates for how much free cash flow I expect the business will generate lower and that had the impact of lowering the intrinsic value to 52. The current market price is 55.

So, to update my ranking on Cava Group, as I mentioned, I downgraded it on August 13th to a hold and today I will be reiterating that ranking.

It does not look like the lower price has fallen enough to justify upgrading this or buying the stock for me. I'm waiting for a better entry point.