CAVA Stock Rallies as Earnings Confirm It’s a Top Growth Play

Key Points

• CAVA stock is roaring by 10% after releasing its second quarter 2024 earnings results, wowing markets into new potential upside. 
• Double-digit growth has taken over all of CAVA's business drivers lately, sending the company into positive cash flow territory. 
• As recent results justify, Wall Street analysts could soon recognize higher price targets in the coming quarters.

The economy has given investors plenty of reasons to stay away from consumer discretionary stocks lately, from inflation-choked consumers driving credit card delinquency rates higher to the postponement of interest rate cuts coming from the Federal Reserve (the Fed). However, a few worthy mentions in the space demonstrate strength through any cycle.

By popularity and affordable quality, stocks like Chipotle Mexican Grill Inc. NYSE: CMG and McDonald’s Co. NYSE: MCD have gathered momentum and strength in the stock market lately based on their fundamental and technical strengths. Joining the party as the new name on the restaurant stocks block comes CAVA Group Inc. NYSE: CAVA, whose shares rallied by as much as 10% in the after-hours trading session of Thursday evening.

The bullish reaction came after the company released its second quarter 2024 earnings results, which more than justified a rally for the stock and a second look from investors looking for a value play in this industry. But, before a reasonable assessment of where CAVA stock could be headed, here’s why investors should not ignore the numbers inside the quarterly release.

All Business Drivers Are Firing on All Cylinders for CAVA Stock

Starting with the most commonly watched business driver, sales, and revenue, CAVA reported revenue up to $231.4 million in the quarter, representing an annual jump of 35.2% compared to the same quarter of 2023. Moreover, despite the 18 new locations added during this time, comparable sales also grew by 14.4%.

Restaurants and other retail stocks often inflate their net revenue growth by adding new restaurant or store opening revenues, which is why considering comparable sales growth can tell investors what the real situation looks like for the business. Knowing CAVA has cleared this hurdle, here's what is running hot under the hood.

The lifeblood of any business is its free cash flow (operating cash flow minus capital expenditures), which acts as a proxy for net income and fuels further growth and investor benefits. In 2023, CAVA generated a net negative free cash flow, but that changed for the recent quarter, as CAVA made up to $22.7 million in free cash flow.

From here, investors can somewhat assume that profitability will continue to persist. What comes next are the compounding effects of reinvested capital, along with other perks like potential buyback programs. As CAVA keeps opening new locations, economies of scale could allow management to spread costs thinner and retain more capital.

That's why outlooks for the rest of the year remain as bullish as ever. For the next quarter, management expects to see net new openings of 54 to 57 locations, aiding the economies of scale perspective and further profitability for CAVA. This is also reflected in the 8.5% to 9.5% comparable sales growth expected for the period.

Knowing that the bullish evidence is building on itself for a brighter future in CAVA stock, Wall Street analysts had no choice but to forecast accordingly for the next 12 months.

CAVA Stock's Upside Still Shines Bright for the Future

Wall Street analysts forecast up to 35.3% earnings per share (EPS) growth for the next 12 months. This is bold enough but still conservative, considering the massive growth CAVA has portrayed thus far in the quarter.

Following recent financial momentum and EPS projections, Stifel Nicolas decided to place a higher price target on CAVA stock. This time, they offer a view for up to $110 a share, which is the same price the stock rallied to after the earnings announcement.

This calls for a new adjustment in price targets, which could soon be made to reflect the further upside that lies ahead for CAVA stock after reporting such a strong quarter. Reiterating this view, investors can point to signs of bearish capitulation, as CAVA stock’s short interest declined by over 5% in the past month alone.

Other signs of overall market bullishness can be found in CAVA’s valuation multiples compared to the average valuation of the rest of the eating places industry. Today, CAVA stock trades at a price-to-book (P/B) ratio of 20.5x, significantly above the industry’s average valuation of 4.0x.

Typically, markets are willing to pay a premium for stocks that deserve it, and this time, CAVA has proven itself to be a growth compounder commanding a justified premium valuation. More than that, some institutional players saw enough reason to buy more CAVA stock this quarter.

Federated Hermes boosted its own position by 9.7% in the past quarter, bringing its net investment up to $98.3 million today, another sign of bullish confidence for the future.