What happened
Shares of Cava Group (CAVA -0.64%), the fast-casual Mediterranean restaurant chain and recent IPO, were soaring this week after the quiet period following the company's IPO expired, allowing analysts from the underwriting investment banks to issue ratings on the stock.
Not surprisingly, most of the commentary, which came out on Monday, was positive, and the stock was up 20.3% for the week as of Thursday's market close, according to data from S&P Global Market Intelligence.
Image source: Cava Group.
So what
Cava jumped out of the gate after its IPO last month, and the stock mostly traded sideways prior to this week. However, a flurry of positive analyst mentions gave a stock a boost on Monday that provided momentum over the subsequent days with the help of a cooler-than-expected inflation report on Wednesday.
On Monday, six analysts initiated coverage on the stock with buy-equivalent ratings, while two called the stock a hold equivalent.
For example, JPMorgan Chase's John Ivankoe, who gave it a buy rating, said Cava had a "broadly appealing consumer offering," making it well positioned to expand from its current base of 263 restaurants and become a national brand.
Meanwhile, William Blair's Sharon Zackfia predicted that the company would deliver revenue growth of at least 20% through 2026 and forecast a 9x improvement in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Zackfia gave it an outperform rating.
The stock rose 11% on the news and continued to gain over Tuesday and Wednesday, adding another 3% on Tuesday and jumping 14% on Wednesday after the consumer price index rose just 3% year over year, its slowest pace since March 2021. The news makes it less likely that the Fed will continue raising interest rates and is evidence that the economy should be able to avoid a recession, which is good news for Cava as both a cyclical restaurant chain and a growth stock.
The stock pulled back 8.3% on Thursday on no news, which was perhaps a sign that investors believed the stock had become overheated.
Now what
The debate over whether Cava is the next Chipotle is already heating up on Wall Street.
Cava's growth figures are impressive, as revenue has grown at a compound annual rate of 52% from 2016 to 2022, reaching $564.1 million last year. Comparable sales rose 14.2% last year, and it reported an adjusted EBITDA profit of $12.6 million to $14.6 million. Its 20.3% restaurant-level operating margin is also solid and should drive profitability as it grows.
Plenty of smaller restaurant chains have flamed out before, but Cava looks promising. At a price-to-sales ratio near 10, however, the stock's growth is likely to be muted until profits ramp up.
