The stock of Mediterranean-style fast-casual restaurant chain Cava Group Inc. soared 11% Monday, after analysts initiated coverage on the stock which made its debut on public markets in mid-June with a flurry of buy ratings.
At least four of the banks that were underwriters on the initial public offering — JP Morgan, Stifel, William Blair and Jefferies — assigned the stock a buy rating or the equivalent.
Morgan Stanley took a slightly more subdued approach with an equal weight rating. FactSet shows a total of six buy ratings and a sole hold rating but it’s a restricted listing so it’s not clear who it’s from.
The company
CAVA,
raised $317 million in its initial public offering, which priced above its proposed range at $22 a share and immediately rallied on opening. The company issued 14.4 million shares at a valuation of $2.45 billion. The stock was last trading at $43.83.
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The company is not profitable and has high cash burn and just $23 million in cash and cash equivalents on its balance sheet, according to its IPO filing documents.
But analysts were unfazed, with William Blair analysts calling it a clear leader in a fast-growing category with proven geographic appeal.
“CAVA has hit upon a winning formula with its customizable menu of bowls and pitas featuring bold Mediterranean flavors that can fit in any dietary preference,” wrote analysts led by Sharon Zackfia.
“CAVA’s customer appeal is evident in average unit volumes (AUVs) of roughly $2.5 million and a 44% five-year revenue CAGR through 2022.”
The company accelerated its growth with the 2018 acquisition of Zoës Kitchen, “which provided immediate access to attractive real estate in new markets while enabling capital-efficient densification in top-tier trade areas (Zoës conversions roughly half the cost of a typical greenfield CAVA),” they wrote.
That has set the company up to end 2023 with roughly triple the number of locations as it had in 2020.
William Blair estimates that there’s room for at least 1,200 domestic Cava restaurants based on the population per restaurant already achieved in Virginia, where it’s still adding locations.
That supports management’s target of 1,000-plus locations by 2032.
“We also see the potential for digital drive-thrus to further lengthen CAVA’s growth runway while lifting AUVs (and potentially returns), with about one-third of this year’s new units having drive-thrus, ramping up to about half in 2024 (versus roughly 20 drive-thrus today),” they wrote. William Blair initiated coverage with an outperform rating.
JP Morgan launched coverage with an overweight rating and a December 2024 $45 stock price target. Analysts cheered the entrepreneurial sprit of Founder and CEO Brett Schulman with help from Chairman Ron Shaich, the founder of Panera Bread.
“In-store design/operational procedures and back-end support for the network allows CAVA to be efficient, safe and consistent as the brand leverages these systems for its goal national brand penetration,” they wrote in a note to clients.
Mediterranean cuisine covers many types of food and occasions, so the end-market is large, topping out at more than $1 trillion in U.S. sales.
While bowl builds priced at $10.95 to $16.95 will likely limit a high frequency of lower-income consumers, “we believe the brand has an enduring appeal to a very broad customer base for at least occasional usage.”
And suburbs are 82% of the site mix and are expected to remain a key location base, they added.
Stifel and Jefferies analysts initiated coverage with a buy rating and $48 price target. Stifel analysts led by Chris O’Cull also cheered the wide appeal of the food and compelling unit-level returns and highlighted the company’s healthy balance sheet.
“The company is in strong financial condition with no funded debt and roughly $340M in cash on hand following the company’s IPO,” they wrote in a note to clients. “We project the company’s average quarterly cash balance will remain above $200M with no funded debt for the foreseeable future. We project positive annual free cash flow starting in 2026.”
Even Morgan Stanley was upbeat on the stock, albeit it’s taking a longer-term, wait-and-see approach before committing to a bull case. The bank assigned the stock a $43 stock price target.
“We’ve attempted to look at valuation carefully, based on both near-term numbers and more distant expectations for the company’s expansion, which leaves us with less upside to our price target, even generally buying into the next decade’s bright expansion plan, and this drives our EW rating,” analysts led by Brian Harbour wrote in a note.
“Experience would suggest there will be other entry points, and the next few years should provide critical proof points as CAVA enters the 350- to 500-store range, in our view, which may enable us to underwrite a bull case with higher AUVs, margins, and TAM,” they wrote. TAM stands for total addressable market.
Still, not everyone is convinced the company is a buy. David Trainer, chief executive of New Constructs, an independent equity research firm that uses machine learning and natural-language processing to parse corporate filings and model economic earnings, published a series of critical reports before the IPO.
Trainer questioned Cava’s ability to reach profitability and its high valuation. He even compared it to WeWork
WE,
the infamous startup created by Israeli entrepreneur Adam Neumann, that at its peak was valued at $47 billion, but is now trading at just 26 cents a share, or a market cap of $521 million.
The Renaissance IPO ETF
IPO,
has gained 32% in the year to date, while the S&P 500
SPX,
has gained 15%.
For more, see: Fast-casual restaurant chain Cava Group’s IPO documents raise some red flags: analyst
Read now: Cava Group CFO is confident restaurant chain will be profitable—but she won’t say when
Related: 5 things to know about the fast-casual Mediterranean restaurant chain Cava
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