Dutch Bros (BROS +2.01%) and Cava (CAVA +4.03%) are among the hottest consumer stocks. Both companies are rising stars with room to expand across the United States. Dutch Bros is disrupting a competitive coffee landscape with its drive-through store model, while Cava Group is establishing its brand as the leader in Mediterranean food.
Both stocks have outperformed the broader market over the past 19 months, but that's history. Which stock is the better buy right now?
I did the homework on each and compared their business models, finances, and valuations to determine which stock makes more sense for investors today.
Here is what you need to know.
Dutch Bros may have more expansion potential, but Cava's business performance shines brighter
Both companies operate in the same industry but have vastly different business models. Dutch Bros primarily sells coffee and energy drinks, which people often grab and go. The company emphasizes small drive-through stores that can process orders quickly. You can grab a meal from a Cava store on the run, but food is inherently slower to prepare, and people often sit and eat. Restaurants also require kitchens, so they might need more square footage and cost more to open.
NYSE: BROS
Key Data Points
Dutch Bros currently has 950 stores compared to Cava's 352. Both companies could open new stores for years, but thanks to its drive-through store model, I think Dutch Bros will ultimately open more locations. However, Cava shines at the individual store level. The company has grown same-store sales at a double-digit rate in four of the past five quarters. Meanwhile, Dutch Bros has generally produced low to mid-single-digit same-store sales growth over the past two years. In other words, Dutch Bros is growing more from opening new stores than Cava, which has enjoyed a boost from strong same-store performance.
Cava's revenue growth has accelerated in recent quarters while Dutch Bros' has slowed:
BROS Operating Revenue (Quarterly YoY Growth) data by YCharts
Long-term investors might hope Dutch Bros follows a trajectory like Starbucks. The coffee giant has over 18,000 stores today in North America. Meanwhile, Cava resembles a fellow niche food restaurant brand in Chipotle Mexican Grill. Chipotle hopes to eventually operate 7,000 stores across North America, a much smaller footprint.
The good news is that both can work. Starbucks and Chipotle have enriched investors over the years.
Cava's financials could lead to eventual share repurchases
The organic same-store growth has also helped Cava's financials. The business is already cash flow-positive with $43 million in free cash flow over the past four quarters on $913 million in revenue. Dutch Bros has generated almost $1.2 billion in revenue but has burned $10 million in cash.
The great thing for Cava is that it can fund new locations organically. It owns all of its stores -- and bears the costs to open and operate them. The cash flow signals the business is profitable despite those growth investments, and the cash flow adds to a strong balance sheet with $367 million in cash and no debt. Dutch Bros has plenty of cash on its balance sheet ($281 million) but also already has $240 million in long-term debt.
Cava could begin share repurchases in the next couple of years (another Chipotle move), funding its store expansion while using excess cash to lower its share count and drive earnings per share (and the stock price) higher over time.
However, Cava's aggressive valuation complicates the conclusion
All else equal, Cava is currently the better business. It has superior same-store sales growth, plenty of room for expansion, strong cash flow, and a decent balance sheet.
NYSE: CAVA
Key Data Points
But valuation matters, and Cava has been on an absolute heater since the stock went public. Today, Cava trades at a price-to-earnings ratio of 240. Meanwhile, analysts estimate the company will grow earnings by an average of 30% annually over the long term. Dutch Bros isn't cheap, either; the stock has a P/E of 172, with analysts calling for 35% annualized long-term earnings growth.
If you use the PEG ratio to compare each stock's valuation to its growth rate, investors must pay far more for Cava's growth (8.0 PEG ratio) than Dutch Bros' (4.9).
Cava is a phenomenal business, but Dutch Bros is no slouch. Today, Dutch Bros is the better buy. If Cava's valuation sinks to a more reasonable level, investors would be wise to jump on it. Until then, even great companies can be poor stocks if the price is too extreme.
